Why markets fall and what to do
Corrections, bear markets and panics — how often they happen and why they are the price of admission.
The names and the frequency
A 10% decline is called a correction and happens almost every year. A 20% decline is called a bear market and happens on average once every few years.
Declines of 30% or more happen a few times over an investing lifetime. All of them so far have recovered, though some took years.
When you know these numbers in advance, a 15% decline becomes something expected, not proof that something has gone wrong.
Why you get paid to endure them
Historically, shares return more than deposits precisely because they are hard to hold. If there were no declines, there would be no extra reward either.
The higher return is not a gift — it is payment for enduring the uncertainty and not selling when it falls.
So risk should not be avoided entirely; you should take as much of it as you can endure to the end.
What to do when it happens
The most important decision is made before the fall, not during it: how much of your money is invested, and whether you have a reserve that lets you avoid selling.
During a decline, the best move is usually to keep up your regular contributions. They buy more units for the same money.
If a decline keeps you up at night, that is valuable information: your portfolio is riskier than you can truly endure. Adjust it after the market calms down, not in the middle of the panic.
How often they happen
| Decline | Name | Historical frequency |
|---|---|---|
| −10% | Correction | Almost every year |
| −20% | Bear market | Once every few years |
| −30% or more | Crisis | A few times in a lifetime |
Key terms in this lesson
- Correction
- A decline of about 10% from the most recent peak.
- Bear market
- A decline of 20% or more from the peak.
- Bull market
- A long period of rising prices.
- Capitulation
- Mass selling out of despair, which often marks the end of a decline.
Quick check
Why have shares historically paid more than bank deposits?
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