When a stock index falls by more than 10%, it is often said to have entered “correction” territory. That’s a fairly neutral term for what feels like a nerve-wracking drop to many investors. What does a correction mean? What’s likely to happen after a correction, and what can you do to help your portfolio weather the downturn? Here are answers to some commonly asked questions:

What is a correction?

There’s no universally accepted definition of a correction, but most people consider a correction to have occurred when a major stock index, such as the S&P 500® index or Dow Jones Industrial Average, declines by more than 10% (but less than 20%) from its most recent peak. It’s called a correction because the drop often “corrects” an overshoot and returns prices to their longer-term trend.

Is it the start of a bear market?

Nobody can predict with any degree of certainty whether a correction will reverse or turn into a bear market. However, historically most corrections haven’t become bear markets (that is, periods when the market falls by 20% or more). There have been 22 market corrections since November 1974, and only four of them became bear markets (which began in 1980, 1987, 2000 and 2007).

Since 1974, only four market corrections have become bear markets

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. Each period listed represents the beginning month/year of either a market correction or a bear market. The general definition of a market correction is a market decline that is more than 10%, but less than 20%. A bear market is usually defined as a decline of 20% or greater. The market is represented by the S&P 500 index. Past performance is no guarantee of future results.