market forces

Does a Decline in Stock Prices Signal a Down Year?

market forces

It's only natural to feel a bit anxious when stock markets start to fall.

As prices keep sliding, research into behavioral finance suggests that many investors tend to project those losses forward. And if market turbulence intensifies, so can such emotional responses, especially when price fluctuations extend past one or two sessions. 

How often does that really happen, though? Taking a step back and looking over a longer timeframe, it becomes evident that investors shouldn't be surprised by multitudes of short-term periods in which prices temporarily drop. 

Let's consider an extended period of the Russell 3000 index's daily returns. It's an all-cap benchmark that tracks 98% of the U.S. stock market. Notice in the chart below, this 'total stock market' index generated positive returns in 15 out of 20 years (through 2019). 

Such positive results took place despite a daily roller coaster effect in stock prices. So how much fluctuation actually happened during these years? The chart's major highlights include:

  • Intra-year declines for the index ranged from 3% to 49%. 

  • Calendar-year returns improved on those spurts in volatility as the steepest declines saw notable recoveries.

  • During the financial crisis in 2009, an intra-year drop of 27% was a head fake to traders as stocks wound up gaining 28% at year's end. 

To drill down even deeper into how fickle stocks can be during shorter timeframes, we've put together another chart (see below). It breaks down drops of 2% or greater in daily returns of the IFA U.S. Total Market Index during the same 20-year period as shown in the previous chart.

Although no significant daily declines took place in some years, it wasn't a common occurrence. In fact, more than 230 days (234) wound up closing in the red. That translated into an average of nearly 12 days a year in this two-decade period in which stocks fell by 2% or greater. 

The takeaway here is clear: Volatility shouldn't be considered as an anomaly. Whether you're putting money into small-, mid- or large-cap stocks, a roller coaster effect in market pricing is a regular part of investing. (If you want to read more about how to make such a daily tug-of-war in prices play to your advantage, see "A Better Investment Experience: Three Tips.")

During bouts of extreme market volatility, it's only natural to become uneasy -- even worried -- about your long-term financial security. While such emotions can't be totally ignored, focusing on facts and self-education can go a long way towards developing a lasting and rational investment strategy. 

Sorting through all of the historical data is one challenge. Putting such information into a practical perspective to help construct a well-thought out portfolio strategy is another. 

Along those lines, we recommend that investors check out IFA's Risk Capacity Survey. It's designed to measure how much portfolio risk is appropriate in an investor's portfolio at any given time. The RCS is available onliine to everyone, whether you're a novice at investing or more experienced at dealing with portfolio asset-allocation issues. 


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, service, or considered to be tax advice. There are no guarantees investment strategies will be successful. Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc. For more information about Index Fund Advisors, Inc., please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.