Topic: Investment · Type: Timely · Reading time: ~6 min

The S&P 500 has dropped 10% or more in roughly half of all calendar years since 1980. Despite that, its average annual return over the same period has been around 13%. Those two facts sit side by side, and most investors never reconcile them. They treat every correction like something that wasn't supposed to happen — when the data suggests it happens about as reliably as tax season.

A market correction — typically defined as a 10–20% decline from a recent peak — is not a signal that something has gone permanently wrong. It is a reset. Valuations that stretched too far snap back. Speculation gets wrung out. And, crucially, assets that were previously expensive become available at better prices. What you do in that window shapes your returns for years.

Here is what the evidence actually says about the best investments to make during a market correction.

Why the instinct to wait is the most expensive mistake

The emotional pull during a correction is to go to cash and wait for things to "settle down." This is understandable. It is also, historically, costly.

Charles Schwab's research covering a 20-year period from 2006 to 2025 illustrates the problem precisely: investors who remained fully invested earned an annualised return of around 11%. Those who moved to cash after a downturn and missed just the ten best days during that same period earned only 6.6%. The trouble is that many of those best days occur inside corrections — often on the same week as the worst ones.

The loss-and-recovery pattern is not new. Every significant drawdown in modern market history — including the 2008 financial crisis, the 2020 pandemic collapse, and the "Liberation Day" tariff shock of April 2025 — has eventually been followed by a recovery that exceeded the prior peak. That is not a guarantee for the future. But it is the base rate. Planning around the exception, not the rule, is how investors underperform.

Worth knowing: Missing just the 10 best market days in a 20-year period cuts annualised returns nearly in half. Most of those days happen during corrections — not after them.

The case for broad index funds — even now

The most reliable answer to "what should I buy during a correction?" is also the least exciting one: keep buying what you were already buying, and consider buying more.

For most investors, that means a globally diversified index fund. A fund tracking the MSCI World Index, for example, typically carries a total expense ratio (TER) of around 0.2% and gives exposure to thousands of companies across developed markets. When it drops 15%, you are not buying distress — you are buying the same underlying businesses at a 15% discount. Dollar-cost averaging works particularly well here: by keeping contributions steady through a correction, you automatically buy more units when prices are lower, reducing your average cost over time.

Lump-sum investing, by contrast, outperforms DCA roughly two-thirds to three-quarters of the time over long horizons, according to Vanguard's research — simply because markets trend upward, and time in the market compounds. But during corrections specifically, DCA provides the psychological infrastructure that lets investors keep going rather than freezing. The best strategy is often the one you can actually execute.

Where corrections hit unevenly — and how to use that

Not all sectors fall equally during a correction. This is one of the most practically useful things to understand, and most advice skims over it.

Data from early 2025 makes the point sharply: when the broad market (as measured by SPY) was down 1.6% year-to-date as of early March, the healthcare sector ETF (XLV) was up 7.7%, consumer staples (XLP) up 4.4%, and utilities (XLU) up 3.1%. These so-called defensive sectors — healthcare, consumer staples, utilities — share a common feature: the demand for their products is largely inelastic. People do not cancel their medication when markets fall. They still buy food. The electricity stays on.

Historically, defensive sectors outperform the broader market in over 80% of major corrections since 1990. They typically underperform during bull runs — that is the trade-off — but if your portfolio is weighted toward high-growth, high-valuation tech stocks and corrections concern you, a modest allocation shift toward defensives is not panic, it is rebalancing.

Specific instruments worth knowing: the Consumer Staples Select Sector SPDR (XLP), the Health Care Select Sector SPDR (XLV), and the Vanguard Dividend Appreciation ETF (VIG), which holds companies that have grown dividends for at least ten consecutive years and includes names like Procter & Gamble and Microsoft. VIG has outperformed the US market during several of the worst market crises of the last two decades, including 2008. Dividend investing more broadly is having a revival in the current environment — for reasons that are structural, not just reactive.

Gold's role has changed — and not in the way you might expect

Gold used to be described as an inflation hedge. That framing undersells what it has actually done. In 2025, gold rose approximately 42% — its strongest annual performance since the late 1970s — while equity markets corrected multiple times. Central banks globally purchased 863 tonnes of gold across the year, well above the 2010–2021 annual average of 473 tonnes, according to the World Gold Council.

What is driving this is not nostalgia for the gold standard. Emerging market central banks — from Kazakhstan to Brazil to Turkey — have been deliberately reducing their dependence on US dollar-denominated assets. That structural bid for gold is not going away when the next earnings season starts. J.P. Morgan Research forecasts gold prices moving toward $5,000 per ounce by the fourth quarter of 2026.

For individual investors, gold is not a replacement for equity — it is a portfolio stabiliser. A 5–10% allocation to a physically backed gold ETF (such as IAU or GLD in the US, or iShares Physical Gold in Europe) gives a real hedge against both equity corrections and currency instability, without requiring you to store anything. The caveat is timing: gold has run hard, and buying at inflated levels means accepting that the near-term return premium may already be priced in.

High-quality bonds and cash: boring is a feature, not a bug

One piece of advice that fell out of fashion during the zero-rate era is worth revisiting: investment-grade bonds are a legitimate correction hedge again. With money market yields running near 4% in the US, and short-dated government bonds in Europe offering positive real returns for the first time in years, holding some fixed income is no longer a drag — it is a contribution.

BlackRock's April 2025 commentary cautioned that long-dated US Treasuries may no longer provide the reliable portfolio ballast they once did, and recommended investors seek alternative hedges. Short-to-medium duration bonds from high-quality issuers remain sound. High-grade corporate bonds add yield without abandoning quality. Understanding how bonds work — particularly their inverse relationship with interest rates — matters before adding duration risk.

Cash, too, has earned its place back in portfolios. Not as a market-timing tool, but as a structural cushion. Holding three to six months of expenses in liquid savings means a correction does not force you to sell investments at the wrong moment.

What this means for your next move

A correction is not a crisis that requires urgent action. It is a repricing event that rewards preparation.

If you already hold a diversified portfolio of index funds, the best move is usually to keep contributing and resist the urge to rebalance away from equities at the moment they look most alarming. If you have been sitting on cash waiting for a better entry point, a 10–15% correction is, by definition, a better entry point than what came before it. If you want to reduce volatility without exiting equities, a modest tilt toward defensive sectors and dividend-growth stocks is a thoughtful adjustment — not a panic reaction.

The investors who build wealth through corrections are not the ones who predicted them. They are the ones who had a plan, kept their costs low, and did not confuse short-term fear with permanent loss.