Market correction: What is it, and how does it affect investors?

Specialist Ronnie Howard, centre, calls out prices as he works at his post on the floor of the New York Stock Exchange, Thursday, Oct. 16, 2014. (AP / Richard Drew)

North American markets have been hard-hit this week, adding to declines that began in September, and plunging the TSX further into "correction" territory. If you’re wondering what it means for the economy and your bank account, here’s an explanation.

In professional investor speak, a "market correction" occurs when a benchmark market index closes 10 per cent or more below a recent peak.

The TSX, which has been hard hit by a sudden drop in commodity prices, crossed that threshold earlier this week. It's fallen approximately 12 per cent from its early-September peak and is close to erasing all its gains for the year.

The S&P 500 -- a benchmark index commonly used to judge the state of markets in the U.S. -- is down more than 7 per cent below the peak it reached on Sept. 18. The S&P hasn't seen a drop that big in at least two years, and some analysts say the tumble may not be over yet.

All of this is understandably making a lot of investors nervous. But many market watchers, including CTV finance expert Patti Lovett-Reid, says it's important not to panic and begin selling off investments when the markets are in a trough.

"Corrections are a normal part of the market. We don't like it, but they certainly are (normal)," Lovett-Reid told CTV's Canada AM Thursday.

"Many have said that this was long overdue and there's a whole host of reasons for that."

As for why the markets are tumbling, Lovett-Reid points to messages from the U.S. Federal Reserve that it will soon stop pumping money into the U.S. economy. The Germany economy is also struggling badly and "the eurozone is an economic mess right now," she says.

As well, energy prices are sinking and interest rates are poised to rise sometime soon. And then there are the unexpected "black swans" impacting the market, including the Ebola, ISIS, Russia-Ukraine and Hong Kong.

"These are events we weren't even talking about at the beginning of 2014, and they have the absolute potential to disrupt the market," she says.

But Lovett-Reid says it's important not to let a sense of panic take hold. Instead, she advises investors contact their financial advisors and ask them to ensure that their portfolios still have the right mix of investments. That means ensuring it is globally diversified with no more risk than you can tolerate.

"Let's put in context. This is a correction. Corrections happen in the market all the time. If you've got a good situation in your portfolio, sit tight, we will get through this. We have before, we will again," she says.