What Is Correction?
A market correction is a decline of 10-20% from a recent peak. Learn what causes corrections, how long they last, and what to do during one.
Definition
A market correction is generally defined as a decline of 10% to 20% from a recent peak in a major stock index like the S&P 500. Corrections are a normal and healthy part of market cycles -- they release built-up excess and reset valuations. Historically, the S&P 500 experiences a correction roughly once every 1-2 years.
A correction becomes a bear market if the decline exceeds 20%. The distinction matters because corrections tend to be shorter and shallower, while bear markets are longer and deeper. The average correction lasts about 3-4 months and recovers within 4-5 months. Bear markets average about 13 months with much longer recovery periods.
Corrections can be triggered by a wide range of factors: rising interest rates, geopolitical events, disappointing earnings seasons, valuation concerns, or simply investor sentiment shifting from greed to fear. Sometimes there is no clear cause at all -- markets overshoot on the way up and then correct.
Real-World Example
In January 2022, the S&P 500 fell 12% from its all-time high in a classic correction driven by inflation fears and expected interest rate hikes. Investors who sold in panic locked in their losses. Investors who stayed invested or bought more saw the market recover and hit new highs within a year. This pattern -- correction, panic, recovery -- has repeated dozens of times throughout market history.
Why It Matters
Corrections feel terrible when they are happening, but they are the price of admission for long-term stock market returns. If you invest in stocks, you will experience corrections regularly. Understanding that corrections are normal and temporary (not the same as crashes or recessions) helps you avoid the most common and costly mistake: panic selling at the bottom. The best long-term investors treat corrections as buying opportunities, not emergencies.
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Frequently Asked Questions
What is the difference between a correction and a crash?
A correction is a 10-20% decline that typically happens gradually over weeks or months. A crash is a sudden, steep decline (often 20%+ in days) caused by a specific event or panic. Corrections are normal; crashes are rare and extreme.
Should I sell during a correction?
If you are a long-term investor, generally no. Corrections recover relatively quickly. Selling locks in losses and you then face the challenge of timing your re-entry. Historical data overwhelmingly supports staying invested through corrections.
How often do market corrections happen?
The S&P 500 has experienced a correction (10%+ decline) about once every 1-2 years on average since 1950. They are a regular part of investing, not unusual events.
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