ELI5: Market Corrections

woman biting pencil while sitting on chair in front of computer during daytime

With doomsday forecasts dominating the headlines, let's take a step back to understand what "market corrections" are so we can better grasp what's going on.

What is a Correction?

A correction is a 10% drop in value. Corrections could be referring to assets like individual stocks and bonds, many times it's used to describe the downfall of a market as represented by an index like the S&P 500.

Many try to time corrections but no one truly knows when they will happen. A correction can happen shockingly quick. The fastest correction happened just this past week, with the S&P 500 declining 10% in 6 days.

How Often Do They Occur?

Corrections happen quite frequently. In the past 20 years, the S&P 500 has experienced 10. With one occurring every 8-12 months.

Corrections are not rare, but you would think they were given how much attention (i.e. panic) they generate every time.

How Long Do They Last

Corrections can last anywhere from a few weeks to a few years. The longest correction in recent history lasted 2.5 years, the aftermath of the dot com bubble. The shortest correction happened in early 2018, lasting only 13 days.

Most corrections tend to be short-lived, lasting 3-4 months.

What Should I Do?

Market corrections are perfectly normal and can even be healthy. They keep stock prices in check whenever valuations get out of control, playing a vital role in bubble prevention.

As long as you're in a well-diversified risk-appropriate portfolio, everything will be fine. Zoom out and think long-term, corrections only represent small blips of your journey.

Ignore the noise and the urge to time the market (the odds are not it your favour). Take a deep breathe, stay the course and enjoy the discounts.

"Widespread fear is your friend as an investor because it serves up bargain purchases."

- Warren Buffet

Comments

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Starting Really Really Small

On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread. The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can. To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do. Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.

Herman Ye

Search