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Stocks and bonds can both lose value during a market correction. Stocks usually have greater volatility and higher long-term growth potential; bonds are generally less volatile and offer more modest returns, but they are not a guaranteed counterweight when stocks fall. Whether to change your investments depends on your goals, time horizon, and tolerance for losses—not on the word “correction” alone.
What stocks and bonds represent
A stock is an ownership interest in a company. A bond is a loan to a company or other issuer: the bondholder is owed payments under the bond’s terms. In a corporate bankruptcy, bondholders have priority over shareholders, though that does not guarantee full repayment. A company is not required to pay dividends on its common stock. The SEC’s overview of stocks and its bond guide explain these differences.
How stocks and bonds can behave in a correction
A correction is a market decline; the label does not mean every investment falls by the same amount or that one asset class must outperform. The SEC’s broad historical comparison says stocks have had the greatest risk and highest returns among the three major asset categories, while bonds generally have lower volatility and more modest returns. These are general historical tendencies, not guarantees about future results or a forecast for a particular correction. Large-company stocks as a group have lost money on average about one out of every three years, according to the SEC; that figure is not the frequency of corrections or the odds of a loss in any specific year. See the SEC’s investment products overview.
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Bonds do not necessarily rise when stocks fall. Fixed-rate bond prices generally move in the opposite direction from market interest rates. If rates rise, existing fixed-rate bonds may become less attractive than newer bonds, putting downward pressure on their prices—even while stock prices are also falling. Bond prices can also respond to changes in the issuer’s credit quality and to supply and demand.
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Why bond prices can fall when interest rates rise
A fixed-rate bond’s payments are set by its terms. When newly issued bonds offer higher rates, investors may pay less for an older bond with a lower coupon to make its return more competitive. The SEC explains that maturity and coupon affect a bond’s sensitivity to rate changes. In its June 26, 2013 Investor Bulletin, the SEC’s Office of Investor Education and Advocacy wrote: “The longer the bond’s maturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity, which may have a negative effect on the price of the bond.” Read the SEC’s fixed-income guidance.
- Maturity: Longer-maturity bonds generally carry more interest-rate risk than otherwise similar shorter-maturity bonds.
- Coupon: The bond’s stated interest rate also affects sensitivity; bonds with different coupons can react differently to rate changes.
- Credit quality: If investors become less confident that an issuer can make its payments, the bond’s value may be affected. High-yield bonds carry more risk than higher-quality bonds.
Individual bonds and bond funds are not the same
An individual bond has stated payment terms and a maturity date. Holding it to maturity can make interim market-price changes less important to an investor who receives the promised payments, but it does not remove the risk that the issuer will default. Selling before maturity can result in a gain or a loss, depending on the sale price.
A bond mutual fund or ETF is different: an investor owns fund shares, not an individual bond with a personal maturity date. A fund’s share price can fluctuate as the bonds it holds change in value. For a bond-focused mutual fund or ETF, review its prospectus to understand its holdings and risks. The SEC discusses these distinctions in its corporate bond guidance.
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Should you sell stocks during a market correction?
A correction by itself does not establish that selling stocks is the right move. A more useful starting point is to compare your current portfolio with the allocation you intended to hold, then consider whether your goals, time horizon, or ability to tolerate losses have changed. The SEC identifies those factors as relevant to asset allocation. It also notes that an investor approaching a goal may choose to hold more bonds relative to stocks because reducing risk can matter more than pursuing as much growth potential. That is an illustration of goal-based allocation, not a recommendation for every investor. See the SEC’s asset-allocation guide.
- Check the purpose of each holding. Identify what each investment is intended to do in your portfolio, rather than judging it only by its recent price movement.
- Revisit your goal and timeline. Consider when you expect to need the money and whether that schedule or goal has changed.
- Assess your tolerance for losses. Ask whether the portfolio’s ups and downs are consistent with the amount of risk you can accept.
- Compare your current mix with your intended allocation. Decide whether a change is warranted based on your plan and circumstances, not on a prediction that one asset class will lead in the next correction.
What diversification can—and cannot—do
Holding investments across asset classes can reduce dependence on a single investment or category. It cannot guarantee a profit or prevent losses when markets decline, and it does not mean every holding will move in opposite directions. The SEC describes diversification as a way to manage risk, not insurance against a market drop. Its diversification guide explains the limits.
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