Jonah Patel
Stock market corrections can be a scary prospect, even for experienced investors. There is no universally accepted definition of a correction, but it generally refers to a decline of more than 10% but less than 20% from a recent peak. A decline of 20% or more is typically considered a bear market or a market crash. Corrections can be caused by a slowing or shrinking economy, investor sentiment, and outside events such as wars, attacks, or oil supply shocks. While downturns can be unsettling, they are usually short-lived, with an average recovery time of eight months for corrections between 10%-20%. To prepare for a market correction, investors should consider creating a financial plan, reviewing their risk tolerance, and ensuring their investment portfolio aligns with their risk appetite and goals.
| Characteristics | Values |
|---|---|
| Decline range | More than 10% but less than 20% |
| Average time to recovery | 8 months |
| Benchmark | S&P 500 index |
| Volatility measure | CBOE's Volatility Index (VIX) |
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What You'll Learn
A market correction is a fall of more than 10% but less than 20%
Market corrections can be an unpleasant experience, but it's important to keep them in perspective. They are a natural part of the market's volatility and can provide opportunities for long-term investors to add to their portfolios. On the other hand, bear markets, which are declines of 20% or greater, tend to be longer-lasting and more challenging.
It's worth noting that the duration of a market correction is shorter than that of a bear market. Market corrections have historically lasted around four months on average, while the average bear market has lasted roughly 14 months. Additionally, the average time to recover from a 10%-20% correction is eight months, according to some sources.
Preparing for potential market downturns is always a good idea. Investors should consider creating a financial plan, reviewing their risk tolerance, and adjusting their investment portfolios to match their risk profiles. These steps can help investors stay calm and make informed decisions during volatile market periods.
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A bear market is a fall of 20% or more
A bear market is a fall in the stock market of 20% or more from its most recent peak. While there is no universally accepted definition of a market correction, it is generally agreed that a fall of more than 10% but less than 20% constitutes a correction. Therefore, a bear market is a more severe version of a market correction.
Bear markets are unpleasant but occur periodically throughout virtually every investor's lifetime. Since 1966, the average bear market has lasted roughly 14 months, ending as abruptly as it began with a quick rebound. In contrast, bull markets, or the periods between bear markets, have lasted nearly nine years on average.
It's important to note that worrying excessively about a bear market can be counterproductive. However, it's always a good idea to be prepared. Investors should consider investing strategies that can help their portfolios and emotional well-being during significant downturns. Having a written financial plan can help calm nerves and make it easier to stay the course when markets get bumpy. Knowing that you're financially prepared for a downturn can make it easier to stomach when it arrives.
Additionally, reviewing your risk tolerance is crucial. It's relatively easy to take risks when the market is rising, but market downturns can be a wake-up call to adjust your target asset allocation. De-risking your portfolio can make weathering a bear market more manageable. It's essential to ensure that your investment portfolio aligns with your risk tolerance and financial goals.
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A decline of less than 10% is a dip or pullback
While there is no universally accepted definition of a market correction, a decline of less than 10% is typically referred to as a dip or pullback. This is a brief downturn from a sustained longer-term uptrend. For example, the market may rise 5%, linger, and then fall 2% over a few days or weeks.
Dips are common occurrences in the stock market. On April 4, 2025, markets experienced their worst one-day decline since 2020, with all major indexes falling 5% or more. The volatility was attributed to J.P. Morgan and other brokerages increasing the odds of a U.S. recession in 2025 due to the Trump administration's new global tariffs.
A market correction, on the other hand, is generally defined as a decline of more than 10% but less than 20%. A decline of 20% or more is typically considered a bear market. The average time to recover from a 5%-10% downturn is three months, while a 10%-20% correction takes about eight months.
It's important to note that the stock market is subject to fluctuations, and investors should be prepared for downturns and corrections. Having a financial plan and reviewing risk tolerance can help investors navigate volatile market conditions and make informed decisions about their investment portfolios.
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Corrections last around four months on average
While there is no universally accepted definition of a market correction, most people consider a correction to have occurred when a major stock index, such as the S&P 500 or Dow Jones Industrial Average, declines by more than 10% but less than 20% (a bear market) from its most recent peak. A bear market, on the other hand, is defined as a decline of 20% or more.
Market corrections occur relatively often. Since World War II, there have been 26-27 corrections in the S&P 500, with an average decline in the index of 13.7%. A correction is usually a short-term move, lasting anywhere from three to four months on average before the market recovers to prior levels. However, the duration of a correction can vary, ranging from a few weeks to a few months or even longer. For instance, the stock market correction in February and March 2020 due to COVID-19 lasted about three months, whereas the correction in September 2020 only lasted three weeks.
The length of a correction also depends on whether it transitions into a bear market. Bear markets tend to last longer than corrections, averaging 14 to 16 months in the past. A correction can turn into a bear market if there are significant underlying issues influencing the market. For example, a correction in October 2007 transformed into a bear market over the course of about a year as fears of the long-term economic impact of the real estate bubble took hold.
In summary, market corrections are typically short-term events that last around four months on average. However, the duration of a correction can vary depending on various factors and there is always the possibility that a correction could develop into a lengthier and more severe bear market.
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Bear markets are longer, lasting 1.4 years on average
A bear market is generally defined as a decline of 20% or more from the previous peak close. Bear markets tend to be longer than corrections, with an average duration of 1.4 years. In contrast, corrections have an average duration of around four months. The average bear market decline since 1987 has been 46.5% over 1.4 years, while the average bull market duration has been around nine years.
Bear markets occur periodically and are an unpleasant but normal part of investing. They can be caused by various factors, such as a slowing or shrinking economy, investor sentiment, policy uncertainty, and outside events such as wars or oil supply shocks. It's important to remember that bear markets don't last forever and often end abruptly with a quick rebound.
Preparing for a bear market is essential. Investors should consider creating a financial plan, reviewing their risk tolerance, and adjusting their asset allocation to ensure their portfolio aligns with their risk tolerance and financial goals. While bear markets can be challenging, historical data shows that long-term investors have typically been better served by adding to their portfolios during corrections rather than withdrawing money.
Additionally, it's worth noting that the recovery time from a market correction is generally shorter than that of a bear market. A 5%-10% downturn typically recovers in about three months, while a 10%-20% correction takes about eight months. These averages provide context for understanding the potential duration of market downturns and subsequent recoveries.
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Frequently asked questions
A market correction is a fall in the market value of more than 10% but less than 20%.
A bear market is a decline of 20% or greater.
On average, corrections last around four months.
A market crash is a decline of 20% or more.
A dip or pullback is when the market declines by less than 10%.
