Correction, bear market, crash
These terms are conventions, not official rules:
- Pullback: a drop of roughly 5–10%.
- Correction: a drop of 10–20% from a high.
- Bear market: a drop of 20% or more.
- Crash: a very sudden, severe drop, often over days or weeks.
What causes corrections
Common triggers include rising interest rates, disappointing earnings, economic worries, geopolitical events, or simply prices having run ahead of fundamentals. Often there is no single clear cause, and explanations appear only in hindsight.
How often they happen
Historically, the US stock market has experienced a correction roughly every year or two on average, though the timing is irregular. Many recovered within months; some continued into bear markets. There is no reliable way to know in advance which will be which.
Why it matters to a portfolio
A 15% correction on a $50,000 all-stock portfolio is a $7,500 paper loss. A portfolio with 40% in bonds would typically fall less. Knowing your likely drop in advance makes it easier to avoid selling in a panic.
Key takeaways
- A correction is a 10–20% fall from a recent high.
- They are common and do not always lead to bear markets.
- Predicting their timing or depth is not reliable.