A volatile mix of concerns over tariffs, inflation, and economic growth, as well as uncertainty about the future direction of government policy, pushed several major U.S. stock indexes into correction territory in mid-March—meaning they had fallen more than 10% from a recent high.
"Correction" is fairly neutral term for what can be an unpleasant experience. But what does it mean? And, more importantly, what might happen afterward and how can you help your portfolio weather the downturn? Here are answers to some commonly asked questions:
What is a correction?
There's no universally accepted definition of a correction, but most people consider a correction to have occurred when a major stock index, such as the S&P 500® Index or Dow Jones Industrial Average, declines by more than 10% (but less than 20%—that would be a bear market, but more on that below) from its most recent peak. It's called a correction because historically the drop often "corrects" and returns prices to their longer-term trend.
Do corrections mark the start of a bear market?
Nobody can predict with any degree of certainty whether a correction will reverse or turn into a bear market (that is, periods when the market is down by 20% or more). If it's any consolation, historically most corrections haven't become bear markets. There have been 27 market corrections since November 1974—including the current one—and only six of them became bear markets (which began in 1980, 1987, 2000, 2007, and 2020).
But what if it really is the start of a bear market?
Bear markets are unpleasant, but the fact is that they occur periodically throughout virtually every investor's lifetime.
It's also helpful to keep them in perspective. Since 1966, the average bear market has lasted roughly 14 months, far shorter than the average bull market. And they often end as abruptly as they began, with a quick rebound that is very difficult to predict—a case in point is the S&P 500's pandemic-fueled bear market in early 2020, which lasted a mere 33 days from the previous high on February 19 to the trough on March 23. That's why long-term investors are usually better off staying the course and not pulling money out of the market, as long as their situation hasn't changed.
What should I do now?
Worrying excessively about a bear market can be counterproductive, but being prepared for one is always a good idea. Consider investing strategies that potentially could help your portfolio—and your emotional wellbeing—in case of a significant downturn. Here are some additional steps all investors should consider:
-
If you don't have a financial plan, consider making one. A written financial plan can help you craft an appropriately balanced portfolio. It can also calm your nerves and make it easier to stay the course when markets get bumpy. The idea here is that knowing you're financially prepared for a downturn can help you stomach them when they arrive.
-
Review your risk tolerance. It's relatively easy to take risks when the market is rising, but market downturns sometimes can be a wake-up call to consider adjusting your target asset allocation. Consider how much loss you have the emotional and financial capacity to handle.
-
Rebalance regularly. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It's a good idea to rebalance at regular intervals.
-
Take your age into consideration. If you're a younger investor saving for a goal that is 15 or more years away, you have time to potentially recover from a market drop. However, the picture may change for investors nearing or in retirement. Regular rebalancing and appropriate diversification are important for you at this stage, and your risk profile typically will become more conservative as retirement approaches. If you've recently retired and begun to withdraw from your portfolio, you also should be aware that poor returns in the early years of retirement can have a very negative effect on a portfolio; consider taking steps to avoid selling assets in a down market, such as reducing your planned withdrawals or postponing large expenses.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.
Rebalancing does not protect against losses or guarantee that an investor's goal will be met. Rebalancing may cause investors to incur transaction costs and, when a non-retirement account is rebalanced, taxable events may be created that may affect your tax liability.
Schwab does not recommend the use of technical analysis as a sole means of investment research.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© Charles Schwab
More Buffer ETFs Topics >
