Between February 19 and March 13 of this year, the S&P 500 index declined by 10%.
This was the first 10% pullback since August to October of 2023.
When stock markets decline by 10% or more from their recent highs, especially when it has been nearly a year and a half since the last occurrence, many investors become anxious.
However, these corrections are not only normal but also a healthy part of long-term investing with advantages for some investors. “Normal,” of course, doesn’t always mean easy or intuitive to navigate without good advice.
In this edition of the Master’s Minute blog, we discuss what they are, how often they typically happen, why they can indicate a healthy market, and good strategies for navigating market corrections to help you make informed decisions and understand your best options.
Stock Market Corrections: A Normal and Necessary Part of Investing
Just like the natural cycles of life, such as the changing seasons, the stock market historically experiences periodic fluctuations. Understanding the nature of market corrections can help investors remain calm and make informed decisions rather than reacting emotionally.
What Is a Stock Market Correction?
A stock market correction is defined as a decline of at least 10% but less than 20% from a recent peak. Unlike bear markets, which involve declines of 20% or more, corrections are typically short-lived and occur multiple times within a decade.
For example, between 1945 and 2014 there were 27 market corrections, and of those, only 12 resolved to full-blown bear markets. That works out to corrections occurring about 1 in every 31 months. More recent data shows that market corrections are becoming a little more frequent.
The Frequency of Market Corrections
Historically, market corrections have always been a regular occurrence. According to more recent averages, the stock market experiences at least one 10% correction or greater approximately six out of every ten calendar years.
Whether that is due to additional market volatility or other factors, it reflects a more active correction environment of 1 in 20 months compared to the older averages of 1 in 31 months.
While these declines can be unsettling, they often present buying opportunities for long-term investors, which we discuss a little later in this article.
Below is a chart showing the frequency of stock market pullbacks over the past 25+ years:
Why Corrections Are Healthy
The increasing frequency of market corrections may give investors pause, but the fact is that these events are essential parts of a healthy, dynamic market.
Corrections serve a crucial role in financial markets by:
- Preventing excessive speculation and overvaluation
- Allowing new investors to enter at lower price points
- Providing opportunities for disciplined investors to buy quality stocks at a discount
- Helping markets recalibrate to economic and corporate fundamentals
How to Navigate Market Corrections
While market dips can be intimidating, there are opportunities to be had. Making informed decisions based on your long-term investment strategy during these times can lead to benefits for the investor.
Rather than fearing corrections, investors can take advantage of them by:
- Staying Invested – Long-term investors who ride out corrections tend to benefit as markets historically recover.
- Diversifying – A well-balanced portfolio helps cushion losses during market downturns.
- Buying the Dip – Market pullbacks often provide great opportunities to invest in quality assets at lower prices.
- Maintaining a Long-Term Perspective – Avoid making hasty decisions based on short-term market fluctuations.
Final Thoughts
Stock market corrections are not only common but also essential for a well-functioning market. While they can be nerve-wracking, history shows that markets tend to recover and reach new highs over time. By staying informed and maintaining a disciplined investment strategy, investors can turn market corrections into opportunities rather than pitfalls.
If you or someone you know would like a second opinion on whether your portfolio is positioned appropriately to weather a downturn in the stock market, please contact us. The team at Master’s would be happy to offer our perspective on your current portfolio.
