A Stock Market Correction Is Coming Eventually. Here's How the Smartest Investors Are Preparing.

Key Points

• Given how often they usually occur, the S&P 500 is already overdue for a price-resetting correction.
• A decent pullback, however, isn’t necessarily something for long-term investors with properly balanced portfolios to fear.
• Indeed, with a smart plan already in place, a sizeable dip can be a fantastic buying opportunity.
• These 10 stocks could mint the next wave of millionaires ›

Now, roughly four years into the current bull market and nearly a year and a half since the S&P 500 (SNPINDEX: ^GSPC) suffered a stumble of at least 10%, investors are understandably antsy. We're overdue for an ordinary correction, and with lingering inflation still driving interest rates higher, it's not wrong to worry that a small setback could start a full-blown bear market.

The possibility doesn't necessarily mean you need to panic or even take immediate action. It does mean, however, you might want to start making a mental plan for this worst-case scenario, including cleaning up some of your ... shall we say, more questionable and less-permanent holdings.

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Here's some help on this front.

Statistics say down markets happen this often

You likely already know that a bear market is a pullback of at least 20% from a peak, separating one bull market from another. Mutual fund company Hartford reports that since 1929, a bear market materializes about once every three years, lasts a little less than a year, and shaves off an average of about 35% of the S&P 500's pre-bear-market peak, versus a typical bull market's gain of more than 100%.

Corrections of 10% or more, however, are far more common. Several occur during bull markets, in fact, without actually ending that bull market. Numbers from brokerage firm Charles Schwab indicate that since 1974, the S&P 500 has experienced 27 unique corrections, only six of which became bear markets.

That means every bull market goes through four to five corrections before it finally runs out of steam and suffers a true bear market, resetting the cycle. To this end, the current bull market's only seen two corrections so far, with the last one taking shape in March of last year.

In other words, if you're playing the statistical odds, you don't have to fret too much about any setback that might be lurking around the corner (although it wouldn't be wrong to mentally prepare for all possibilities).

Even so, every correction has a way of subtly -- and sometimes not so subtly -- reshaping the tone and timbre of the bull market it temporarily interrupts. That is to say, things aren't quite the same as they were before a corrective move. The next correction isn't likely to be an exception.

Market correction action plan

So what should smart investors do to prepare for a correction that might materialize somewhere between the immediate and not-so-near future and that may or may not have a predictable, lasting impact on the bull market? Here are the four big moves to consider making sooner rather than later.

1. Go ahead and let go of your hype-driven winners

Even the most disciplined of investors can occasionally let hope and excitement get the better of them, inspiring the purchase of a more speculative holding you might not normally step into. And that's OK. It happens.

Just understand that sweeping marketwide weakness tends to identify and punish low-quality stocks first and foremost, which often don't recover in full alongside the rest of the market. If you know you've got a few of these names in your portfolio, go ahead and dump them now while you can, so you won't be forced to lock in a loss later.

2. Confirm that your portfolio still reflects your plan

Even after cleaning out the picks that aren't really worth holding for the long haul, it's absolutely possible your remaining holdings -- even if of good quality -- are no longer collectively right for you.

A lopsided sector allocation is the most likely problem to solve right now. Most investors are now overexposed to technology stocks and energy stocks, largely due to the two sectors' tremendous performances over the past year. Conversely, investors (income investors in particular) may be underexposed to underperforming utility stocks.

It's not just a matter of poorly balanced sector allocations, however. Inflation has been persistently high for the past year or so, finally pushing interest rates to multiyear highs. Income investors will want to rethink things if they haven't made any major adjustments of late. It might make sense to lock in the higher yields now available with corporate and government bonds that just weren't an option until now.

3. Make a shopping list, and then buy those stocks when they're on sale

You don't necessarily need to reconstruct your portfolio right away, however. If you're still going to have time after any correction -- or even a bear market -- has run its course to achieve some growth, use the pullback as a discounted entry point into some holdings you've chosen before the sell-off is underway and incites a panic.

Just don't look past the biggest danger here. That's the quest for buying in at the exact bottom, which you'll never see until well after the fact. Being patient is fine. Waiting on the sidelines so long that these stocks are well into a rebound before you step in isn't.

The fact is, a year from now, you won't care or even remember if you perfectly timed your entry. You just want a decent discount.

4. Mentally prepare for distracting, deceptive emotions by embracing the facts

Finally, prepare now for the uncertainty, stress, and distracting noise that could prompt you into making an ill-advised decision at the worst possible time. In the grand scheme of things, market corrections aren't that big of a deal (and in the long run, bear markets aren't exactly devastating either).

Knowing the facts helps keep things in perspective, like Schwab's finding that most of the 27 corrections the S&P 500 has been through since 1974 didn't end the bull market they took shape within. Put another way, mutual fund outfit Fidelity points out that between 1980 and 2025, half of each year saw at least one 10% or greater decline.

Bear markets really aren't all that uncommon or problematic. In many regards, corrections are opportunities.

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Charles Schwab is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.