A market correction sounds scary. The word "correction" implies something was wrong. But in reality, corrections are one of the most normal, predictable features of the stock market.
What a Correction Is
A market correction is defined as a decline of 10% or more from a recent high in a stock index, individual stock, or other asset.
If the S&P 500 hits 5,000 and then drops to 4,500, that is a 10% correction.
How Often They Happen
Market corrections happen roughly once a year on average. Since 1928, the S&P 500 has experienced an intra-year decline of at least 10% in about two-thirds of all calendar years.
Despite these regular corrections, the market has finished the year positive in about 70% of those years. In other words, corrections are usually temporary interruptions in longer-term uptrends.
Correction vs Bear Market vs Crash
- Correction: 10% to 19.9% decline. Common. Usually recovers within months.
- Bear market: 20% or more decline. Less common. Can last months to years.
- Crash: Sudden, violent decline (often 20%+ in days or weeks). Rare.
A correction does not always turn into a bear market. Most corrections reverse before reaching the 20% threshold.
What Causes Corrections
Corrections can be triggered by many things:
- Rising interest rates
- Disappointing economic data
- Geopolitical events
- Stretched valuations (stocks got too expensive too fast)
- Sector-specific problems spreading to the broader market
- Simple profit-taking after a strong rally
Sometimes there is no clear cause at all. Markets move in cycles, and occasional pullbacks are the mechanism that keeps valuations in check.
What to Do During a Correction
Nothing, if possible. The most successful long-term strategy during corrections is to hold steady and continue investing as planned.
Rebalance if needed. If the correction has shifted your asset allocation significantly, it may be a good time to rebalance.
Review but do not react. Check whether the fundamentals of your holdings have changed. If the businesses are still sound, the lower price is not a reason to sell.
Consider buying. For long-term investors, corrections can be opportunities to buy quality investments at lower prices. This requires having cash available and emotional discipline.
The Biggest Mistake
The biggest mistake during a correction is panic selling. Selling at the bottom of a correction and waiting for things to "settle down" before buying back is the definition of buying high and selling low.
Markets often recover quickly. Some of the best trading days in history have occurred within days of the worst trading days. Missing those recovery days dramatically reduces long-term returns.
The Bottom Line
Corrections are normal. Expecting them, understanding them, and having a plan for them is the difference between a reactive investor and a prepared one.
The Progressive Trailblazer helps you understand what you own so you can hold with conviction through normal market cycles. Educational only. Not financial advice.