How can I tell if a market downturn is short or long term?

topic of this article is the answer to the following question: How can I tell if a market downturn is short or long term?

Most investors worry about the state of the stock market.You're always hearing about it on the news, there are always analysts discussing it, and everything seems to be linked to the stock market and whether it's doing well or whether it's suffering a down turn.

Why should you be worried about whether or not the stock market is going through a downturn?Well, obviously, if you own stocks and the stock market is not performing well, then chances are that your stocks are also going to suffer a downturn.However, it is important to remember that particular stocks might perform differently than the general stock market, and also if you have stocks will a low beta measurement, then they probably will not fall as hard as the stock market does.Even if you don't trade in stocks, you retirement account is most probably tied to the stock market, Social Security is often tied to the stock market, and so on and so forth.

There is really no magic formula that can tell you whether or not a down turn in the stock market is going to be long term or short term.There are a lot of different things that you can look at that can help you generally tell whether or not the market down turn will be short term or long term.Look at the pattern of unemployment, for example.Is there a history of declining unemployment?Does it seem to continuing downwards?Is it pretty stable, even though the market is in a down turn?What is the Federal Reserve doing with investment rates?Is the Federal Reserve Board acting as if they are trying to stave off a depression or a recession?
Are they increasing interest rates because the economy can no longer afford to support lower interest rates?

Look at the long term trends in the market.When you look at the chart, do you see steadily declining performance over a longer period of time, or is this current downturn seeming to be just a short natural corrective in the stock market?Look at the performance in other areas: the housing market, etc.If the other markets seem to be performing badly, then you can get a greater picture of what's going on in the economy at large.

One of the reasons why you need to know if the market down turn is long term or short term is so that you know how to react to it.If the market starts to perform badly, then you probably are going to want to sell all of your stocks off before you lose a lot of money on them.This is a pretty wise move to make if the down turn is long term, because you will continue to be losing money on the stocks as they decrease in value.However, if you end up freaking out and selling off all of your stocks, but the down turn ends up being short term, then you have lost a lot of money by making a serious mistake.Overreacting to a short term down turn will make it really hard for you to stay on track with your investment goals.Here's a rather shocking figure:

if you have sold off all of your stocks, and you end up missing the 10 best days in a whole 10 year period, then you will have cut the average annual return of any investment in the Standard and Poor/TSX index almost in half.That's a pretty serious blow to your portfolio right there, and it's something that could happen to you if you don't keep things in perspective.

It's also important that you remember that you can actually end up making money in a market down turn.If you hold on to your stocks, they could end up bouncing back and you will make more money.If you only think in terms of the short term, then you won't be able to make much money in the stock market because the only real way to make gains in your value is if you hold on to your stocks and ride the wave.You are always taking a chance when you invest in the stock market, and so if you are worried that a market down turn is actually long term, you need to look at the other indicators in the economy and the history of this downturn so that you don't overreact and lose money by selling your stocks too soon.