Correction

A correction is a temporary pullback in a rising market, conventionally a fall of around 10% from the peak. Once it passes 20% it is no longer a correction but a bear market.

Corrections are normal rather than exceptional. Markets do not rise in a straight line, and periodically cooling an overheated price sets up the next advance. Statistically a drop of roughly 10% arrives about once a year.

The hard part is telling a correction from a change in trend. If earnings and the economy are unchanged and only the price has fallen, a correction is likely; if the earnings outlook itself has broken, a longer decline may be starting.

During a correction, sticking to the existing plan is usually the best move. For anyone investing a fixed amount monthly it is a window to buy more with the same money, and for anyone with target weights it is a chance to rebalance. Selling ahead of a correction and buying back requires being right twice, which is why it rarely works. Most people get the second decision — when to re-enter — wrong.