Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Personal Finance What Is a Market Correction? 2025 Trends and How to Protect Your Assets Updated May 20, 2025 10-min read Written by Marc Guberti, CFPC® Written by Marc Guberti, CFPC® Expertise: investing, loans, credit cards, personal finance, banking, business financing Learn more about Marc Guberti, CFPC® The stock market has helped many people generate long-term wealth, but it doesn’t go up forever. While the stock market regularly has red days throughout the year, a string of losses can result in a market correction. A market correction occurs when a market index like the S&P 500 drops by more than 10% from its recent high. These corrections can happen for various reasons, such as stretched valuations coming back to reality, geopolitical concerns, or earnings misses. These corrections can test the resolve of any investor, but it’s best to be prepared instead of being caught off guard. Discover some of the trends that are taking shape in 2025 and strategies you can use to protect your assets. Table of Contents What is a market correction? What happens in a correction? Will a correction happen in 2025? Is a market correction the same as a bear market? How long do corrections last? What should I do if a market correction happens? What is a market correction? A market correction is a 10% drop from the stock market’s recent highs. While the S&P 500 is a good gauge for assessing market corrections, you can also use other benchmarks, like the Dow Jones or the Nasdaq Composite. Individual stocks can also enter corrections even if the stock market doesn’t experience a 10% drop from its recent high. However, individual cases are more nuanced and can come down to a recent earnings report or company-specific news. In some cases, the entire stock market will go down and drag most stocks into correction territory. The stock market regularly goes through corrections, and these are some of the factors that play a role: Changes to the economy: Any changes in consumer spending, interest rates, inflation, and the unemployment rate can impact stock prices. Geopolitical relations: Global conflicts, tariffs, and unfavorable business policies are some of the forces that can result in corrections. Headlines: Media headlines can cause investors to panic and trigger corrections. Emotions are a key driver of the stock market’s price fluctuations. Earnings reports: A series of bad earnings reports from key corporations can result in a market correction. What happens in a market correction? Most stocks go down during a market correction. Investors get nervous about the current outlook and decide to trim their positions. Corrections can increase the overall fear in the market and may present attractive long-term opportunities for patient investors. Stock market corrections are normal and can sometimes be healthy. They allow the market to reset overstretched valuations and allow investors to buy their favorite stocks at lower prices. Most corrections are short-lived and only last for a few months. A correction precedes every recession, but not every correction turns into a recession. It’s rare for corrections to turn into long-term economic downturns. Is a market correction going to happen in 2025? The stock market is currently experiencing a correction. The S&P 500 and Nasdaq Composite are both down by more than 10% from their recent highs. Tariffs have been the main cause of recent corrections, as investors wait with bated breath for any news about the trade war between the U.S. and China. A single Trump tweet or announcement from China on tariffs can lead to sharp volatility in the stock market. It’s hard to predict how long the correction will last since it hinges on the U.S. and China reaching a trade deal. Both countries seem to be playing hardball, but developments have been rapid. The outlook could be dramatically different tomorrow. Previous corrections The two most recent corrections took place in 2020 and 2022. The 2020 correction was caused by the COVID-19 pandemic and resulted in a flash crash. The Federal Reserve swooped in with the money printer and record-low interest rates to pump the stock market. The 2022 stock market correction responded to the strong rally in 2021. However, inflation also reached 40-year highs that year, prompting the Federal Reserve to hike interest rates several times. Interest rate hikes and higher inflation are both bad for the stock market, and they happened simultaneously in 2022. Notably, President Trump caused a market correction during his first term in 2018. It was once again a trade war like the one we’re experiencing now, although he’s taking a more aggressive stance in his second term. The Fed also raised rates four times in 2018. However, the stock market recovered strongly the following year as countries reached agreements and the Fed cut rates three times. Is a market correction the same as a bear market? Market corrections and bear markets are different. While market corrections are defined as any 10% drop in the stock market, you only end up with a bear market if it drops by more than 20% from its recent high. Bear markets are more serious than market corrections, and it usually takes much longer to recover from them than from market corrections. The average bear market lasts for approximately nine and a half months. The recent 2020 flash crash is an exception to the rule; it only took one month for the stock market to recover. These events are also different based on what they signify. Market corrections are healthy and give stocks the opportunity to take a breather before marching higher. However, bear markets show up when there is significant weakness in the economy. Bear markets may indicate that companies are downsizing and borrowing less money. Bearish cycles may also suggest that consumer spending is down. Corrections can occur in strong economies, but bear markets are almost always the result of weak economies. How long do market corrections last? According to consulting firm Yardeni Research, the average stock market correction lasts 115 days. However, that doesn’t mean the market takes 115 days to recover. Corrections officially conclude once a benchmark like the S&P 500 has rallied by 10% from its recent low. For instance, if the S&P 500 drops from 6,000 to 5,100, that’s a 15% drop, which qualifies as a correction. The correction concludes if the S&P 500 marches up from 5,100 to 5,610. This scenario highlights that a correction does not mean the market has fully recovered. In this example, the S&P 500 is still 6.5% removed from its original 6,000 price point despite being out of a correction. It also takes a higher percentage to get back to the previous high. For instance, if the S&P 500 drops by 10%, it must rally by 11.1% to reclaim its previous high. A 15% correction requires a 17.6% rally to return to the previous level. What should I do if a market correction happens? Stock market corrections happen often, so it’s important to know how to respond to them. If the S&P 500 drops by 10% from its recent high, consider these strategies. Do not panic Your portfolio will lose value during a correction. After a few bad days or weeks, it may be tempting to sell some positions to minimize your losses. However, the stock market has been resilient in the long run. Stocks have always returned to all-time highs after enduring corrections and bear markets. You may want to take a break from checking your portfolio or reading the news if it’s affecting your mental health. Read more: Will the U.S. Dollar Collapse? Our Analysis for 2025 Diversify your portfolio Market corrections can feel more stressful if most of your money is tied to just a few individual stocks. You can diversify your portfolio across more holdings and sectors. While you can construct a portfolio with individual picks, it’s easier with exchange-traded fuds (ETFs). These funds allow you to mirror benchmarks like the S&P 500 and Nasdaq Composite instead of trying to beat them. Investors can also pour their capital across asset classes like real estate and gold. While real estate is difficult to access, gold is more affordable for investors. Some gold IRAs allow you to capitalize on the benefits of gold while reducing your tax burden. Gold has been one of the few bright spots of 2025. The price of gold is up by more than 20% year-to-date, while most benchmarks are in correction territory. American Hartford Gold is our top pick for a gold IRA company if you want to diversify this way. It makes it easy to set up a gold IRA or rollover funds to establish one. It also has a streamlined buyback policy. Check out our top gold IRA recommendations to make the right choice. Dollar-cost averaging Dollar-cost averaging is a popular strategy that involves investing a fixed amount every month. These regular investments will give you more shares of your favorite companies during market corrections. The stock market is the only place where people panic when their favorite assets are on sale. Dollar-cost averaging can make investing more methodical and take the emotions out of it. Assess your risk tolerance Market corrections let you see how you feel about your finances when your stock portfolio declines. If you’re feeling nervous about small dips, you may want to consider building an emergency fund and storing cash in a high-yield savings account. That way, you earn interest without risking capital loss. People aren’t as welcoming to risky investments as they age. When you get older, you get closer to retirement and then rely on your nest egg to cover living expenses. You shouldn’t rush to sell your assets, but it is wise to assess how you feel. Tax-loss harvesting Tax-loss harvesting allows you to reduce your taxes without minimizing your exposure to the stock market. If you have an unprofitable investment, you can sell it for a loss and put the money into a similar asset. For instance, an investor with an unprofitable position in Nvidia may consider selling their shares and putting the proceeds into Broadcom. Both AI chipmakers are similar and may enjoy similar price performances over the next 30 days. Once those 30 days are up, you can sell your Broadcom shares and put them into Nvidia. You can follow this strategy for any stock pair in a similar industry. However, the performances of two companies may diverge more if they both report earnings within the next 30 days. You can also use this strategy with ETFs. For instance, you can sell shares of the SPDR S&P 500 ETF (SPY) at a loss and put the money into a nearly identical fund: for example, the Vanguard S&P 500 ETF (VOO). This can reduce your capital gains.