Investing opens investors up to the possibility of losses—but mathematically speaking, not all losses are equal. Understanding the different kinds of losses between a correction and bear market may help investors better handle or prepare for them.
- Corrections come and go, with market losses and recoveries occurring within the span of weeks or months. As such, corrections are generally speaking a blip on the investment journey.
- Bear markets cause more significant losses that require much more recovery time. Unfortunately, bear markets can be plan-altering and life-changing, both financially and emotionally, if portfolios and investors are unprepared.
In the past 20 years, the S&P 500 Index has experienced five corrections (not including the corrections occurring as part of bear markets) and two bear markets.
Corrections are often defined as losses in market value exceeding 10% but less than 20% and happen from a market high. Corrections have historically lasted from between a few weeks to a few months from start of the downturn to full recovery.
Source: Yahoo Finance, S&P 500 Total Return Index. *The recovery of this correction is still ongoing at the time of this posting.
Bear markets are defined as losses in market value of 20% or more and have historically lasted several months to several years. The losses experienced in bear markets are more intense and require longer recovery periods on average than corrections, as shown below.
Source: Yahoo Finance, S&P 500 Total Return Index