What is a ‘correction’ in the equity markets?

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When equity markets hit historical highs recently, you might have heard warnings from some experts of a likely “correction” ahead as there is a disconnect between the stock market rally and economic growth. But what is this “correction”?

In stock market parlance, a correction is defined as a fall of equity markets from their recent peak for a sustained period of time. Technically speaking, a correction is defined as a fall of at least 10% from the 52-week high of the index value. In 2020, as covid was declared a pandemic, the S&P BSE Sensex corrected around 38% in a span of two months. There are instances when the market have corrected over 10% in a few days. How long a stock market correction will last is anybody’s guess. If it continues to correct over a period spanning months, it may be called a bear run.

Is there any way to predict a market correction? No, there isn’t. Nobody can tell you when and for how long a stock market correction will last.

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So, how should you deal with a stock market correction? If you are invested in equities for the long-term, you should not worry about stock market corrections. You should continue investing through the correction, as it will help you average out the cost of buying shares or mutual funds. You will benefit when the correction is followed by a rally.

You should always stick to your asset allocation if markets have rallied, and if your equity allocation is above your desired levels, you should bring down the exposure and shift to safer assets such as debt.

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