The graphic above reminds investors that taking a timeout can help you spot behaviors that may create obstacles to meeting your goals and enable you to avoid emotional investment decisions.
Taking a timeout
Understanding key pitfalls for investors and how to avoid them

Meagan Dow, CFA, CFP®
Senior Area Analyst, Client Needs Research
Too often, our emotions can be the biggest barrier to our investment success. In these situations, it’s important to take a timeout and remember why you’re investing: your retirement, your child’s education, your legacy. A short-term market decline doesn’t change these long-term goals.


The result of emotional investing
Why is it so important to be on your best investing behavior? Poor investing behavior can lead to insufficient diversification among different types of assets, chasing market performance, and moving into and out of the markets (often at the wrong time). Not surprisingly, the typical result of these behaviors is poor long-term performance, which could lead to the biggest risk of all: not reaching your long-term financial goals.
The consequences may be even more dramatic than you think. For example, the average annual return for a balanced portfolio (65% equity and 35% fixed income) over the past 30 years was 8.8%. However, the average U.S. investor received a 4.8% return because of investing behavior. And with the power of compounding, the difference wasn’t simply 4 percentage points a year; it could have been as much as $840,000 over that 30-year time frame.1
When you feel your emotions getting the better of you, take a timeout and work with your financial advisor to review your goals before making what could be an emotional investing decision. Your portfolio and your future self will thank you.
How investing behavior can lead to poor performance


Source: “2022 Quantitative Analysis of Investor Behavior,” DALBAR, Inc. and Edward Jones estimates. Annualized return for the past 30 years ending 12/31/2021. Assumes initial investment of $65,000 in equity and $35,000 in fixed income, rebalanced annually. The equity benchmark is represented by the S&P 500. The fixed-income benchmark is represented by the Barclays Aggregate Bond Index. Returns do not subtract commissions or fees. This study was conducted by an independent third party, DALBAR, Inc., a research firm specializing in financial services. DALBAR is not associated with Edward Jones. Past performance is not a guarantee of future results. Rounded to the nearest $5,000. Indexes are unmanaged and not meant to reflect actual investments.
The bar chart on the left compares the average annual return of a 35% stocks/65% bonds investment over the 30 year period ending in 2021 under two different assumptions: using the return of benchmark stock and bond indexes (8.8%) and the return of the average equity and bond U.S. investor (4.8%). The bar chart on the right shows that an initial investment of $100,000 would have grown to $1,245,000 based on the benchmark’s return but to only $405,000 for the average investor.
Investing behavior: Heading to (or staying on) the sidelines
Whether it’s the economy, the national deficit or market fluctuations, there will always be headlines that can distract you from focusing on your long-term goals. Trying to avoid potential stock market declines may lead to the following bad behaviors.
Trying to time the market
Some investors may try to sell to avoid additional declines. But to time the market successfully, you must get two decisions right: when to get out and when to get back in. Getting one right is difficult; getting two right is nearly impossible.
Holding too much in cash
Others may hold too much in cash, thinking they are avoiding risk. But this could increase the odds of not having enough growth in their portfolios to meet their goals or offset inflation. Not staying fully invested or jumping into and out of the stock market can seriously affect performance, since many investors often get out after declines and then miss the positive moves. The effects of missing the best days can be substantial, as shown in the chart below.
Missing the best days (value of $10,000 investment in the S&P 500 in 1980)


Source: Ned Davis Research, Edward Jones calculations. 1/1/1980-12/31/2021. These calculations assume the best days, defined as the top percentage gains for the S&P 500, including dividends, for the designated period. These calculations do not include any commissions or transaction fees that an investor may have incurred. If these fees were included, it would have had a negative impact on the return. The S&P 500 is an unmanaged index and is not meant to depict an actual investment. Past performance is not a guarantee of future results. Dividends can be increased, decreased or eliminated at any point without notice. Rounded to the nearest $5,000. Copyright © 2022 Ned Davis Research, Inc. All rights reserved. Further distribution prohibited without prior permission.
This chart shows that a $10,000 investment in the S&P 500 in 1980 would have grown to $1,220,000 through the end of 2021 for investors who remained fully invested for the entire period. By comparison, the same investment would have grown to just $545,000 for those who missed the market’s 10 best days, $315,000 for those who missed the 20 best days, $195,000 for those who missed the 30 best days, $130,000 for those who missed the 40 best days, and $85,000 for those who missed the 50 best days.
How to avoid this behavior
Tune out the headlines
When negative events happen, news reports often use extreme language or highlight low periods in the past for dramatic effect. However, the BusinessWeek cover shown here preceded one of the strongest equity markets in history. Focus on your long-term goals and not the ever-changing headlines and remember that we’ve successfully navigated tough periods before.


Credit 1 - BusinessWeek cover used with permission of Bloomberg L.P. Copyright © 2013. All rights reserved.
Credit 2 - TIME magazine, January 10, 1983. © 1983 Time Inc. used under license. Time magazine and Time Inc. are not affiliated with, and do not endorse products or services of, Edward Jones.
This photo shows two magazines with covers focused on negative market news. Time magazine, on the left, features a story titled “The Debt Bomb: The Worldwide Peril of Go-Go Lending,” while BusinessWeek, on the right, touts an article headlined “The Death of Equities: How inflation is destroying the stock market.”
Know yourself
Talk with your financial advisor to better understand your attitudes toward risk. If you know in advance how you may react to specific events, you can be better prepared when the inevitable short-term declines occur.
Understand the risks of not investing
The biggest risk you may face is not reaching your long-term goals. Assuming a modest 3% inflation rate, prices will double during a normal 25-year retirement period. Look to growth investments to help keep pace with inflation.2
Investing behavior: Chasing performance
When the media hype the latest hot investment or highlight dramatic declines in the market, we are often tempted to chase the winners and sell the losers. But this emotional response can lead to buying investments at market peaks and selling them at market lows — a recipe for underperformance.
Chasing winners vs. selling losers


Source: Morningstar. Past performance is not a guarantee of future results.
This graphic illustrates the effects of buying stocks when values are climbing and selling when they decline. The chart on the left shows that $1 billion in technology mutual funds were purchased from December 1992 to December 1994. These funds grew 52% per year from December 1994 to December 1999, fueling optimism. This led to a period of euphoria with investors pouring $20.5 billion into tech funds from December 1997 to July 2000. In mid-2000, however, the dot-com bubble burst, with values dropping 54% as investors gave in to fear and sold $3.6 billion in tech funds.
The graphic on the right shows investors buying $158 billion in U.S. stock mutual funds from March 2002 to March 2004, only to suffer an average annual drop of 7% per year during the next five years amid the collapse of the U.S. housing market and the global financial crisis. Amid this decline, investors sold $122 billion in funds. But markets turned optimistic in March 2009, climbing 32% per year, on average, in the next two years.
How to avoid this behavior
Stay diversified
Instead of trying to find the next hot investment and chasing performance, it’s important to spread your investments across assets and remain diversified. This helps ensure you have different types of assets and investments, each of which may perform differently at different times. By chasing the leading asset class, portfolios may not only end up with a lower return but may also become much less diversified than we would recommend. While diversification cannot guarantee a profit or protect against loss, it can help smooth out market ups and downs, potentially providing a better long-term experience.
The chart shows $25,000 invested each year into either a diversified portfolio (Balanced Toward Growth portfolio objective) or the last year’s best-performing asset class (winners).
Don’t chase performance


Source: Morningstar Direct, 2000–2021. Balanced Toward Growth consists of the following indexes: Barclays U.S. Trsy Bellwethers 3Mon (1%), Barclays U.S. Agg Bond (27%), Bloomberg Global Agg Ex U.S. Hgd (2%), Barclays U.S. HY 2% Issuer Cap (3%), Bloomberg EM USD Agg (2%), S&P 500 (31%), MSCI EAFE (14%), Russell Mid Cap (8%), Russell 2000 (4%), MSCI EAFE SMID (3%) and MSCI EM (5%). Last years winner is defined as the asset class with the highest total return during the calendar year. The asset class comparison consists of the asset classes in the Edward Jones framework and contained in the Balanced Toward Growth portfolio objective. The portfolio shown is a hypothetical illustration. Investor performance will vary. All performance data assumes reinvestment of dividends. Past performance is not a guarantee of future results. Investment indexes are unmanaged and are not available for direct investment. Rounded to the nearest $5,000.
This bar chart compares the performance of $25,000 invested each year from 2000 to 2021 into either a diversified portfolio (Balanced Toward Growth portfolio objective) or the previous year’s best-performing asset class (winners). The diversified portfolio would have grown to $1,455,000, whereas the other portfolio would have increased to just $1,040,000.to just $1,040,000.
Investing behavior: Focusing on the short term
It’s important to focus on the long term, but day-to-day fluctuations can often get in the way. This can lead to:
Fixating on a certain point in time
Depending on the vantage point, the same situation may look very different. For example, some investors sold in 2008 because their portfolios had fallen from an all-time high value, even though their performance may still have been on track and well above where they initially began.
Basing decisions on how the information is framed
The way a situation is presented can influence your decisions. For example: “Dow plummets 300 points” or “Dow declines 1%.”3 Both describe the same situation, but the first sounds worse. With the Dow over 30,000, we should expect larger point moves, but how the media present market movements can lead investors to make emotional short-term decisions.
It all depends on your perspective, as highlighted below. The graphs show the same performance but a different perspective. The first graph shows monthly fluctuations in the S&P 500, and the second shows its long-term performance — illustrating why it’s important to keep a long-term focus.
A monthly perspective vs. a long-term perspective
S&P 500 monthly total returns, 1926 to 2021


Value of $100 invested in the S&P 500 Total Return Index from 1926 to 2021


Source: Morningstar Direct, 12/31/2021. Past performance does not guarantee future results. Calculations do not include commissions or transaction fees that an investor may have incurred, which would have a negative impact on investment results. Total return includes reinvested dividends. The long-term perspective graph assumes an initial investment of $100 on 1/1/1926. The S&P 500 is an unmanaged index and is not available for direct investment. Rounded to the nearest $5,000.
The fever chart on top shows total monthly returns in the S&P 500 over the 95-year period from 1926 to 2021. Monthly performance ranged from a maximum loss of nearly 30% to a maximum gain of almost 40%, highlighting short-term volatility.
The fever chart on the bottom showcases the long-term performance of a $100 investment in the S&P 500 over the same 95-year period. The initial investment expands fairly steadily — except for a sharp drop during the stock market crash at the end of the 1920s — to $1,410,000 in 2021.
How to avoid this behavior
Set realistic expectations and focus on your goals
The stock market averages a 10% correction every year. There have been 33 bear markets and 33 recoveries since 1900. Over a 25-year retirement, you could experience six to seven bear markets on average. So, market declines, while unpleasant, are in fact normal. Measure your performance as progress toward your long-term goals rather than in day-to-day fluctuations.
Understand the purpose of your investments
In retirement, some investments provide you with income today. Others are there to help generate income many years from now. Each serves a critical role in helping ensure your money can last as long as you need it.


The graphic above defines near-term income, which consists of cash and short-term fixed-income investments; medium-term income, which includes intermediate and longer-term bonds and fixed-income investments; and long-term income, which includes stocks and growth investments.
Meagan Dow
Meagan Dow leads the Analyst team within Edward Jones Client Needs Research. This team focuses on creating advice and guidance helping investors prepare for retirement, enjoy their retirement, save for education, plan their estates and protect their financial goals.
Meagan is a Chartered Financial Analyst and a Certified Financial PlannerTM.
Important Information:
1 Source: DALBAR, Inc. and Edward Jones estimates.
2 Investing in equities involves risk, the value of your shares will fluctuate, and you may lose principal.
3 Assumes a Dow value of 30,000.