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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


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