The Facts About Stock Market Corrections

The term "stock market correction" has been used quite a bit over the past year. But what does it really mean? Essentially, a stock market correction is a 10% or greater decline in the price of a stock or a stock index from its most recent peak. Corrections occur in both bull markets (when prices are rising) and bear markets (when prices are falling). They can feel unsettling, but they're a normal part of stock market behavior.

Why Do Corrections Happen?

A correction often occurs when investors take profits or respond to news that creates uncertainty. For instance, economic indicators such as unemployment rates, inflation, and interest rate changes can spark fear or excitement in the market. Even global events, such as political unrest or natural disasters, can trigger a correction.

Are They Common?

Historically, you can expect a correction about once a year on average. Some years may see multiple corrections, while others may see none. They usually last a few weeks to a few months, though duration can vary.

A Silver Lining

You may think that experiencing a correction is something to dread, but corrections can create opportunities for investors. When stock prices drop, it may be a time to buy stocks at a discount. If you've got your eye on a particular stock or sector, a correction might just give you the chance to snag it at a lower price.

Let's Talk General Strategy

If you're invested in the stock market, it's essential to stay calm during a correction. Fear can lead to rash decisions, such as selling stocks at low prices, which can hurt your long-term investment strategy. If the companies you've invested in are strong and their business models are sound, a correction might be just a temporary setback.

Make sure to keep a diversified* portfolio. This means spreading your investments across different sectors and asset classes. If one part of your portfolio goes down, other areas might hold steady or even increase, cushioning your overall investment against major losses.

Lastly, understand your own risk tolerance. Everyone has different comfort levels with market fluctuations. It's okay if you prefer a more conservative approach and want to minimize risk while investing. Corrections are simply part of the journey.

Work with your trusted advisor to invest with confidence — staying informed, staying calm, and keeping your eye on the long game.

*Diversification cannot eliminate the risk of investment losses. Past performance won't guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.