What it is
In investing, "correction” refers to a drop of 10% or more in the value of a specific asset, index, or market after recently reaching a peak.
A correction can be short-lived, or it can last for weeks or months. It typically happens after prices have become overinflated and so they adjust to reflect the “real” value of the affected investment products or markets.
What it means for you
It can be worrying to see a decline in the price of your investment, especially if it was performing well until that point. However, corrections can be quite common and can help calm prices that are rising unsustainably high.
Corrections might be a bigger concern for traders who buy and sell assets quickly. They face a risk of buying an asset during its peak and having to sell after it enters correction.
These events may be less relevant for long-term investors, since it’s possible for prices to recover after a while if an investment is fundamentally sound.
However, if a market correction goes on for longer, it can develop into a bear market which involves a steeper decline.
This underscores the importance of taking steps to prepare for any downturn, including properly diversifying your portfolio.
