Market Corrections Explained: Why They Happen and Why They’re Normal
If you've been investing for a while, you've likely experienced a market correction. Even if you're new to investing, you've probably seen headlines about sudden drops in stock prices. While these events can feel unsettling, market corrections are a natural part of a functioning financial system and are a totally normal part of investing.
In this post, we explain why they happen, why they are normal, and how to navigate them.
What Is a Market Correction?
A market correction is typically defined as a decline of 10% or more from a recent market high. Corrections can occur in major stock indices like the S&P 500, specific sectors, and, more commonly, in individual stocks. Sometimes, market corrections can be confused with bear markets. This can result in a lot of fear in investors. However, unlike bear markets, which involve 20% or more declines and can signal prolonged economic downturns, corrections are usually short-term and often present opportunities for investors.
Why Do Market Corrections Happen?
Market corrections occur for a variety of reasons, including:
Overvaluation – When stock prices rise too quickly, they may become overvalued relative to a company’s actual value or financial status. Corrections help bring valuations back to levels closer to the company’s actual value.
Economic Data & Interest Rates—Changes in economic indicators like inflation, employment reports, or the Federal Reserve's interest rate decisions can cause investors to reassess their positions, triggering a sell-off, which triggers a correction.
Geopolitical Events – Political instability, tariffs, global conflicts, or unexpected policy changes can create uncertainty, leading to market sell-offs.
Investor Sentiment & Speculation—Investor psychology often influences market trends. When optimism turns to fear, widespread selling can push prices downward.
Market Corrections Are Normal (and Healthy!)
While corrections can feel uncomfortable, they are essential in keeping markets balanced. Here’s why they’re a normal and even beneficial part of investing:
They Prevent Bubbles – Markets can become overheated without periodic corrections, leading to unsustainable price increases and eventual crashes. Corrections help stabilize excessive growth.
They Create Buying Opportunities – Market downturns can allow long-term investors to buy quality investments at lower prices.
They Are Historically Short-Lived – On average, corrections last only a few months, whereas bull markets tend to last much longer. Markets have consistently recovered from corrections and continued to grow over time.
4 Strategies to Navigate a Market Correction
If you find yourself in the midst of a market correction, here are a few strategies to keep in mind:
Stay Invested – Trying to time the market is notoriously difficult. History shows that long-term investors who stay the course tend to fare better than those who panic-sell.
Reassess, But Don’t Overreact – A correction is a good time to review your investment plan, but not necessarily a reason to make drastic changes.
Diversify Your Portfolio – A well-diversified portfolio can help manage risk and reduce volatility during market downturns.
Take Advantage of Lower Prices – If you have extra cash to invest, consider buying quality stocks or funds at a discount.
Final Thoughts
Market corrections may be uncomfortable, but they are a normal and necessary part of investing. Rather than fearing them, understanding why they happen and maintaining a long-term perspective can help you turn short-term volatility into long-term opportunity. Investing is a marathon, not a sprint, and corrections are just one of the many steps along the way.
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