Who’s Afraid of a Market Decline?

Dalbar, Inc is an independent financial services research firm that has been analyzing investor behavior for several decades. The Dalbar, Inc Quantitative Analysis of Investor Behavior (QAIB) study provides a look at how individual investors often earn lower returns than the market due to poor timing and behavioral biases.

In the last 25 years, we have faced several significant downturns: the dot-com implosion, the global financial crisis, COVID-19, along with periods of hyperinflation and a spike in federal rates. When a crisis strikes, investors always have a choice. They can act on a long-term plan or react to a temporary market decline.

Long-term plans are based on three long-term historical scenarios. First, that diversified portfolios of mainstream equities will compound at around 10%, as they have for the last 100 years. Second, the S&P 500 Index is projected to undergo an average peak-to-trough decline of approximately 15% on an annual basis. Third, the Index is expected to fall by roughly one-third approximately every five to seven years, on average.

Wouldn’t it be nice to capture the long-term growth and go to cash ahead of a market decline? Unfortunately, the economy cannot be reliably predicted or the market be consistently timed. It may be helpful to view yourself as the owner of enduring, successful companies rather than the owner of highly volatile stocks. 

Let’s have some fun. Apple, Alphabet, Netflix, Verizon, Proctor & Gamble – Would a 50% decline in their stock prices influence your decision to continue supporting these established companies? Do you think many other people would use them less? Most likely, not. These top companies keep innovating and thriving even after major crises are resolved. 

Market timing isn’t investing, it’s speculation. The only practical way to capture the full long-term returns of equities has been to ride out the temporary declines. Seeing oneself as the owner of successful companies who acts on a long-term plan as opposed to reacting to a temporary market decline could be the ultimate behavior modifier. 

Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“PCA”), an SEC-registered investment advisor. Registration as an investment advisor does not imply a certain level of skill or training. PCA does not provide tax or legal advice.