5 Things to Know About a Market Correction

It's been a rough beginning of the year for our stock market. In fact, it has been the worst 10-day start to a year in history.  Between the instability in China and tumbling oil prices (read the full story on oil here), many investors are fearful.  While this fear is understandable, it is important not to make any rash decisions during this market correction.  Running out to sell everything in your portfolio will only cause bigger issues down the road and could potentially severely impact your wealth and savings.

Before you decide you can't take the "pain" any longer, take some time to understand these five things about a market correction. 

1. What Is a Market Correction?​​

Let's start at the beginning with a very basic definition of a market correction: a market correction is a decline or downward movement of a stock or bond, or a commodity or market index. Corrections are a lot like circuit breakers and usually occur when a hot market gets hit with worrisome news. These events cause the market to pause and fall back as institutional and individual investors reassess their positions based on the new information.

2. How Much Does the Market Have to Decline to Be in Correction Territory?​​

The market must decline at least 10% to be in correction territory.  However, many professionals tend to feel that a true correction exceeds that amount.

3. Are Market Corrections Bad?​​

While a market correction may not feel great from an emotional perspective, these respites are actually good for the market.

 Market corrections are also normal. Historically, we can look back to data beginning with the year 1928 and see that the market typically undergoes a 5 percent correction about every 5 weeks, and a 10 percent correction every 33 weeks. 

4. How Long Do Market Corrections Last? Does a Market Correction Mean That We Are in a “Bear Market?”​​

According to various data sources including Dow Jones, Morningstar and Bloomberg, corrections typically take an average of seventy-one days to recover, or between two and three months.

 They usually end when the market "bottoms out" and investors start buying again.  A correction does not mean that we are in a bear market.  A bear market is generally defined as ​a downturn of 20% or more in multiple broad market indexes over at least a two month period.   

5. as an Investor, What Should I Do When There Is a Market Correction?​​

During a market correction, the most important thing to remember is that investing is a long-term activity.  What happens today or tomorrow is not going to throw your whole investment strategy into a tailspin unless you alter it.  You won’t make any money if you pull your money out now and sit on a pile of cash.  Even if you are near retirement age, you will still be invested for many, many years to come.  Young investors should be excited to buy stocks when they get cheaper- especially when they are 10% cheaper in 10-15 days. Your value fluctuations today will be irrelevant in 10 years. 

Are you worried about the current market correction?  If you are properly invested, be confident that your strategy will work over time.  

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Disclosure:  This information is provided to you as a resource for informational purposes only.

  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.