For the first time in more than a decade, U.S. stocks have tumbled into a bear market. That may sound scary, but these kinds of market slumps aren't that unusual — and they can be good for long-term investors.
A major index enters a bear market when it falls at least 20% from a recent high. On Thursday, the S&P 500 joined the Dow Jones Industrial Average in bear market territory. Since reaching their respective all-time highs in February, both benchmarks have fallen by more than 25%.
If you're an investor under the age of 30, this likely is your first experience with a bear market. And while the magnitude of that decline may seem scary, it's especially important for long-term investors to keep perspective at times like this: At current levels, these gauges are trading at levels last seen in early 2019, and the market has always rebounded from similar declines in the past.
Here's what you need to know about bear markets.
A bear market is defined as a decline of at least 20% since a recent high. This can happen for broad markets, like oil or stock benchmarks, and even for individual stocks.
While 20% is the threshold, the market typically tumbles more than that. The current bear market is the 13th since World War II, and in the previous 12, the S&P 500 experienced average declines of 32.5% and took an average of two years to recover.
It's common to see elevated volatility during bear markets, as reflected by both daily movements in the market and a surge in a "gauge of uncertainty" known as the VIX, or the CBOE Volatility Index.
Bear and bull markets derive their names from the animals they represent. Bears attack prey by swiping their paws in a downward motion, whereas bulls attack by thrusting their horns up. In both cases, the 20% threshold is important: When prices are rising by that degree from a recent low, it's a bull market, and when they're falling by that much from a recent high, it's a bear market.
Those highs and lows are also key. That's because the start of a bear market is considered to be that most-recent peak — in the case of the current sell-off for the S&P 500, that date is February 19 — and the eventual end will be at whatever date the market hits its low point before beginning to rebound.
There are two periods to consider when talking about a bear market: how long it takes for a market to fall from its high and how long it takes to recover from the low.
Of those past 12 bear markets, on average, the downturns lasted about 14.5 months and it took another two years for the market to recover, for a total duration of about three years, according to analysis by CNBC and Goldman Sachs.
One thing that's notable about the current market decline is how quickly it happened. It took just about three weeks for the S&P 500 to fall from an all-time high into a bear market — that's the fastest transition like that in history. At this point, no one knows how long the market sell-off will last or how severe it will be.
That said, the market has always recovered from past bear markets and experts predict it will from this one, too. In an interview with CNBC last month, legendary investor Warren Buffett said that while the market's short-term moves are tough to predict, its long-term success is not: "I can come to a pretty firm conclusion that 20 or 30 years from now, American business — and probably all over the world — will be far better than it is now."
No matter the cause of a bear market, the reason stock prices are tumbling in the first place is because traders are worried about the pace of economic growth ahead. But while bear markets often coincide with economic recessions, they don't always. Of the post-World War II bear markets, four didn't overlap at all with a recession.
During a recession, there's a significant decline in economic activity. Many economists define a recession as two consecutive quarters of declines in gross domestic product (GDP), or the sum of the value of all goods and services produced in an economy.
Video by Courtney Stith
While some market watchers are speculating that the U.S. economy already is in a recession, it takes some time to know if that's in fact true.
During a typical recession, you can expect to see increases in the number of people who are unemployed or working fewer hours. That said, the next recession, whenever it arrives, could look much different than the last one.
The Great Recession was the worst, and longest lasting, since the Great Depression that began in 1929. In the past 100 years, there have been 17 recessions, each lasting anywhere from six months to about 3.5 years, according to figures from the National Bureau of Economic Research.
When the stock market is falling, the value of your portfolio will also decline, though the performance of your individual investments may vary. If you're invested in bonds, too, for example, those can serve as a buffer. Since the 1990s, stocks and bonds have tended to move in opposite directions, meaning that bonds can help balance out the risk from your stock investments.
As for whether you should sell your investments at a time like this, experts say that's a mistake. Sell-offs don't mean you, personally, should sell. If you do, you lock in a loss.
Video by Stephen Parkhurst
If you're investing for far-off goals, like retirement, bear markets are "the sale of the century" for for stocks, Jamie Cox, managing director at Harris Financial Group, recently told Grow. And "selling your stocks may be the most expensive mistake of your investing career."
In fact, market downturns can be a great time to start investing, thanks to those lower stock prices. And as market veterans can attest, this current market storm, like others, will pass — and you'll want to be sure you're prepared to benefit from any rebound.
More from Grow: