Market Correction

Corrections are a normal part of how markets behave. They often occur after periods of strong gains, when prices may have risen faster than underlying fundamentals justify, or in response to news such as disappointing economic data, rising interest rates or geopolitical events.

For example, if a stock index rises to 4,000 and then falls to 3,500, it has dropped 12.5%, which counts as a correction.

Corrections can be uncomfortable for investors, but historically they have happened fairly frequently, often more than once every couple of years on average in major markets. Many corrections are followed by recoveries, while some deepen into bear markets with falls of 20% or more.

The 10% and 20% thresholds are conventions used by commentators rather than precise economic definitions.

For long-term investors, corrections can provide opportunities to buy investments at lower prices. Trying to predict corrections and sell beforehand is difficult and can result in missing gains if the market keeps rising. Maintaining a diversified portfolio suited to one's risk tolerance helps investors ride out corrections without making rash decisions.