Man explaining market corrections

What you need to know about market corrections

You may have heard a lot of news about the stock market recently. We’re here to help explain what the changes mean and the impact it could have on your assets.

What is a market correction?

Market corrections are declines in the market of 10 percent or more. Bear markets are declines of 20 percent or more. Market corrections are more frequent than bear markets because they occur when the economy is still growing.

Why would the market correct when there’s a positive economic outlook? Sometimes investors become too optimistic. They create a rally that exceeds current economic performance and the market gets overextended. At that point, any bit of doubtful news can cause a correction.

But if the future trend remains optimistic, buying should resume, leading toward more growth. It’s a natural part of the market cycle.

Exiting the market at these times generally isn’t a good idea. The stock market usually makes up market correction losses in about three months. If you sell during the correction, you will probably not buy in time to make up your losses.

Understanding market correction

The chart below depicts the ups and downs of the S&P 500 from January 1987 – December 2017.1 Market corrections, which are declines of 10 percent or more, are indicated in blue. Bear markets are declines of 20 percent or more and are indicated in orange. Each one is labeled with the amount of the decline and the number of days it lasted.

1Past performance is not an indicator of future results. You cannot invest directly in an index. Actual results may vary.

What can you do?

The stock market going up and down is normal. When the market experiences significant increases, many people can’t help but worry a correction could be coming. If drops in the market make you uneasy, here are some tips:

  1. Don’t panic and be patient. Corrections are expected and are a normal and healthy part of market cycles.
  2. Think long-term and stay diversified. People tend to get out of the market at a time when they may have already lost money. Then they think they can get back in when it starts to go back up. By then, significant gains could have already been made. Bad timing can be costly.
  3. Work with your financial professional. Speak with a financial professional to develop a savings plan, including how you’ll manage market declines.

Sticking to your plan and maintaining a consistent strategy during both good times and bad will help you reach your goals for a fulfilling financial future.