Why are stock market corrections normal and healthy?

Stock Market Corrections are NORMAL

Since 1928, stock market corrections of -10% occur 1.1x per year. Investors rarely remember past corrections or the reason it occured. Rarely, do market corrections turn into a bear market (-20%) or an economic recession but even during those difficult time periods, the markets have eventually, and always, recovered and made new highs.

Time horizons matter for every investor, and these resets never feel good but they are normal.

Why are stock market corrections normal and healthy?

I could explain it myself, but with the growing use of artificial intelligence tools, I asked ChatGPT the question and the answer was too good to not share.

Stock market corrections—typically defined as a decline of 10% or more from recent highs—are both normal and healthy for several reasons:

1. They Prevent Market Bubbles

• When stock prices rise too quickly, they can become detached from fundamentals (earnings, revenue, economic conditions).

• Corrections help deflate excessive speculation before it turns into a full-blown bubble and subsequent crash.

2. They Shake Out Weak Hands

• Corrections often drive out short-term speculators who may have entered the market for quick gains.

• This allows long-term investors to buy quality stocks at better prices.

3. They Provide Buying Opportunities

• Many investors view corrections as a chance to buy fundamentally strong stocks at a discount.

• For long-term investors, buying during downturns can improve portfolio returns over time.

4. They Help Restore Market Balance

• Stock prices can become overextended due to investor optimism or momentum-driven trading.

• Corrections help reset valuations closer to fair value.

5. They Are a Natural Part of Market Cycles

• Historically, the stock market experiences corrections roughly once every 12-18 months.

• While they may feel unsettling, they are expected and do not necessarily indicate a prolonged bear market.

6. They Reinforce Investment Discipline

• Investors who stay disciplined during corrections (rather than panic selling) often see long-term gains.

• Corrections serve as a reminder to maintain a diversified portfolio and stick to a financial plan.

While corrections can be uncomfortable in the short term, they play a crucial role in maintaining a healthy, functioning market. Long-term investors who stay focused on fundamentals rather than short-term price movements are usually rewarded over time.