Market Correction
Definition
A decline of 10-20% in a stock market index or asset price from its recent high, generally considered a normal and healthy part of market cycles that occurs regularly.
A market correction is a pullback of 10-20% from a recent peak — less severe than a bear market (20%+) but more significant than normal daily volatility. Corrections are a normal, recurring feature of healthy markets and should be expected rather than feared.
The S&P 500 experiences a correction roughly every 1-2 years on average. Most corrections don't turn into bear markets — the majority reverse and recover within 3-4 months. Knowing this historical pattern can help investors maintain composure during the inevitable dips.
Corrections serve a healthy purpose in markets. They cool down overheated sectors, bring valuations back to more sustainable levels, and shake out speculative excess. Without corrections, markets would build up even larger imbalances that result in more severe eventual crashes.
For long-term investors, corrections are essentially noise. A 10-15% decline barely registers on a chart of long-term market performance. Investors who panic during every correction and sell incur real losses (transaction costs, taxes, missed recovery) from events that are statistically temporary.
The best approach to corrections is preparation, not prediction. Maintain an asset allocation appropriate for your risk tolerance, keep an emergency fund so you're not forced to sell during a downturn, and ideally have dry powder (cash or rebalancing opportunities) to deploy when prices are lower.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Should I buy during a market correction?
If you have cash to invest and a long time horizon, corrections can be good buying opportunities. Continue your regular investment plan and consider putting extra cash to work. However, don't try to time the exact bottom — nobody can consistently predict when a correction will end.
How is a correction different from a crash?
A correction is a gradual 10-20% decline that usually unfolds over weeks or months. A crash is a sudden, sharp decline (often 10%+ in days). Corrections are normal and frequent; crashes are rare and often triggered by specific events. Both typically recover, but crashes create more panic.