Correction, recession, decline, bear market. There are a lot of terms that are regularly used when the markets fall. While it’s not always wise to get too caught up in the stock market’s day-to-day swings, it’s good practice to warn yourself of bigger developments. Hearing these terms is one thing, but understanding them is quite another. Alphastocks explains what a market correction is, what the difference between a correction and bear market is, and how to deal with it.
Definition of a (market) correction
We immediately run into a problem. Unfortunately, there isn’t really a universally accepted definition for what a market correction actually is. However, the majority of people would consider a market correction when a major stock index — such as the S&P 500 or the Nasdaq — falls more than 10%, but less than 20%, from a recent peak. A market correction can occur over both short and long periods, from a few days to whole years. However, the average market correction will usually last between three and four months.
The same factors that cause an individual stock’s price to rise and fall can also cause a market correction. Political developments, macroeconomic issues, or global incidents, such as a pandemic, can all trigger a correction.
The difference between a correction and a bear market
A market correction can often be confused with a bear market. A bear market means a drop of more than 20% in the market. They usually take longer than a correction and last an average of 14 to 16 months. Corrections often relate to more immediate events, while bear markets are the result of deeper issues that can last for a significant period of time. A correction can of course lead to a bear market. But historically, most corrections have not developed into full-blown bear markets. There have been 24 market corrections between November 1974 and January 2022, and only five of them culminated in a true bear market.
Dealing with a correction
The most important thing to do during a market correction is to avoid panic and stay calm. Hold on to your long-term vision and don’t make rash emotional decisions. If you only invest in diversified ETFs and do so on a monthly basis, you have nothing to worry about. In fact, these declines can be good times to invest a little extra to improve your return over the long term. If you invest in single cryptocurrencies and stocks, make sure that you fully understand the company (or currency) so that you have strong ‘convinction’ and do not sell the company in an emotional mood.
Corrections are more common than you think and are often the result of hasty reactions from investors. If you avoid panic and maintain a long-term strategy, there is a good chance that you will survive the possible corrections that come your way.
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