What Happens During a Market Correction?

Today, we’re talking about something that can make even the seasoned investor a little nervous. And that is a market correction. So you’ve probably heard that term on the news. The market is in correction territory. But what does that actually mean? So a market correction is generally defined as a drop of about 10% from a recent market high. And while that may sound alarming, it’s actually a normal and healthy part of the investment investing cycle.

In fact, if you look at market history, corrections have fairly regularly happened. On average, the stock market experiences a correction about once every 1 to 2 years. So what’s really happening during these periods? First, markets are essentially repricing their risk. Prices sometimes run up quickly when investors are optimistic about economic growth, corporate earnings or lower interest rates. But when new information comes into the picture, like changes in inflation data, interest rate policy or global events,

and that’s when the markets adjust. That adjustment can look like a quick drop. But it’s important to understand that a correction is not the same thing as a market crash or a low long term bear market. In many cases, corrections are simply a pause or a reset before the market continues its long term trend. Another thing that happens during a correction is emotion.

Investors are human, right? When markets are rising, confidence is high. But when prices start to fall, fear sets in. And often that fear leads to people making decisions that can hurt their long term financial plan, like selling investments at a loss or moving out of the market at the wrong time. This is one of the reasons having a long term strategy is so important.

So because when you have a plan in place, one that’s built around your goals, your time horizon, your risk tolerance, market corrections become a lot less scary. In some cases, they can even represent opportunities. So let me share a real life story with you. I think it’ll illustrate this very well. A few years ago, we had a client come into our Traverse City office.

We’ll call him John. He was in his mid 60s and he was planning to retire within the next five years. He had built a solid portfolio over time, but like many people, he was very concerned about market volatility. When the market started dropping during a correction, John called us very worried. He said, should we just sell everything and go to cash until everything settles down?

And that’s a very common reaction. We looked at his retirement timeline. We reviewed his income needs and we talked about the fact that his portfolio was already set up and designed to handle market ups and downs. So rather than selling during the downturn, he stayed invested. And by having the right strategy, proper diversification and clear plan, it helped him navigate through these events with confidence.

If you’re interested in learning more about markets, how markets work, retirement strategies, and how to build a strong financial plan, we share a lot of educational content online. You can visit our Retiring Well YouTube channel where we break down topics just like this one on market volatility, retirement income planning, tax strategies, and a whole lot more in simple, easy to understand videos.

If you’d like to talk about your own financial plan as well, we offer a complimentary consultation where we can review your current strategy, answer some questions that you may have, and help you understand whether your portfolio is positioned properly for today’s market environment. So you can give us a call and schedule a consultation at any one of our Northern Michigan locations.

And at the end of the day, the most important thing is having a strategy that works for you and the confidence to stick through it, through those market ups and downs.