8 Facts You Need to Know About Stock Market Corrections

Scary as they are, drawdowns are a normal part of the investing process. Having a financial plan in place and sticking to it is every investor's best friend.

A big red down arrow representing stocks
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An ugly start to 2022 has forced investors to reckon with the dreaded "C" word.

That's right: One of the three major indexes is officially in a correction, or a decline of at least 10% from its most recent peak. And so it's only natural if investors are antsy, anxious and praying for the bloodletting to end.

For the record, we are not in a marketwide correction. At least not yet. Only the Nasdaq Composite is. As of Jan. 21, the tech-heavy index had fallen 14.3% from its closing peak of 16,057.44 set on Nov. 19.

The S&P 500 and Dow Jones Industrial Average aren't in a correction. But these two benchmarks for U.S. equity performance started off 2022 with a thud, off 8.3% and 6.9%, respectively, from their early January peaks. That's too close for comfort for plenty of investors, and represents a rather nasty and abrupt turn of events.

After all, U.S. markets went from setting one record high after another last year to conceding huge chunks of territory session after session in the early going of 2022.

Rising interest rates and inflation fears are largely to blame. But the selloff is also partly just the flip side of 2021's truly epic performance for equities. The S&P 500's total return (price appreciation plus dividends) came to 28.7% last year. It was among the best years ever for U.S. stocks.

Please remember that markets never move in a straight line. Drawdowns are a part of the process too. As cliched as it is, there really is no free lunch. Risk and return are inseparable.

Perhaps the most dangerous aspect of a prolonged selloff is that it can cause investors to lose sight of their plans and long-term goals. They panic and make mistakes. With that in mind, here are eight things you should know about corrections to help you better deal with them.

Contributing Writer, Kiplinger.com
Patrick Sanders is a freelance writer, editor and stock market expert. He is founding editor of Invested, a daily stock market newsletter published by U.S. News & World Report, and he managed U.S. News' investing advice section from 2015 to 2019. He previously was deputy managing editor of InvestorPlace.com. He operated news websites in southeast Europe and Turkey, was the founding managing editor of the New York Times editing center and was Connecticut news editor for The Associated Press. Patrick has made numerous media appearances as a stock market analyst and appeared on panels to discuss personal finance and investing. He served on the board of governors of the Society for Advancing Business Editing and Writing, and was co-chairman of the training committee to promote and develop training opportunities for business journalists throughout North America. Patrick is a graduate of Marshall University and now resides in Maryland. Follow him on Twitter or connect on LinkedIn.