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Taking the Long View

by Keith J. Hardman

PartnerTalk® // Posted on May 6, 2022

It seems near impossible to go a single day without a barrage of negative headlines in the news. This can be difficult at times for someone, like myself, who is an eternal optimist. But just to name a few current examples: the Russia-Ukraine war and the geopolitical uncertainties that go along with it, ongoing market volatility, soaring inflation and the Federal Reserve’s response, higher energy prices, a nationwide housing shortage, lingering supply chain issues, U.S. border security, and the enduring effects of a global pandemic. Wow. Doesn’t it all just seem too much sometimes? And, who knows, it may well be that things get worse this year before they get better. As investors, how do we remain calm and level-headed while living in a chaotic world?

There are certain dynamics of behavioral finance at play here if we allow the “noise” of the daily headlines effect our investment decisions. One well-established dynamic is that for most investors losses in the market hurt more than gains feel good. Market lows can therefore result in emotional decision making. And when investors seek to take “control” by selling out of the market after the worst days, it is likely to result in their missing out on the best days that follow. Research supports that remaining invested for the long-term in a well-diversified portfolio can result in a better retirement outcome. The recent increased volatility in the markets is a timely reminder that investors will still need the courage not to act—the courage it takes to resist making some sort of knee jerk decision.

We all know, and have experienced, that volatility and risk are an inseparable part of investing. As Craig MacKinlay discussed in his Partner Talk in February, volatility is persistent and we should reasonably expect more periods of high volatility as we move through 2022. The markets will at times surely test our resolve and tempt us to perhaps move to the sidelines until the uncertainty passes. But as the great financial writer (and speaker at a PMA luncheon) Peter Bernstein stated: “we are stuck with uncertainty” and “mastery of investment begins and ends with that.”

Accordingly, time has shown that the best strategy is to stay diversified and invested. Market rebounds can come as quickly and unexpectedly as the sell-offs they follow—just like we experienced with how quickly the markets rebounded after mid-March 2020. Now, granted, the rebound in the second quarter of 2020 came with the help of enormous stimulus from the federal government and the Federal Reserve, but much like the market declines in the first quarter of 2020, the rebound that followed was just as unexpected.

Looking at market returns so far this year, both stocks and bonds have had negative returns. As of this writing, year-to-date the Dow Jones Industrial Average is down over 8%, the S&P 500 is down nearly 13% and the NASDAQ is down just over 21%. As for bonds, the first quarter of 2022 delivered some of the worst bond returns in history. The one thing that can be said for this atypical bond-market event is that this type of performance from bonds is exceptionally rare. Let’s hope the bulk of the damage is behind us and that “April showers bring May flowers.”

I recently looked at some historical market data gathered by Morningstar for the period from 1926-2017, split up into one, five, and fifteen-year annualized returns.* It was striking to see that with one-year periods 74% of the time market returns are positive. Looking at five-year periods the annualized returns are positive 86% of the time. And then when looking out at fifteen-year periods annualized returns are positive 100% of the time. While of course “past returns do not guarantee future results,” this historical context provides some measure of comfort, does it not?

Throughout PMA’s 40-year history our firm has always encouraged our clients to keep things in a historical perspective. In this we are not alone. For example, David Booth, Executive Chairman and Founder of Dimensional, a fund manager with over 650 billion in assets under management, stated: “In times of instability, it is essential to assess whether markets are functioning properly. Right now, markets are behaving as we would expect them to – they are open, trades are executing, buyers and sellers are coming together and setting prices.” He went on to reiterate that “uncertainty and volatility are a part of investing.” As we see “time and again, markets have rewarded investors willing to focus on their goals and stick to their long-term plan.”

In short, keep perspective, stay focused on your long-term plans, control what you can control which is the level of risk you take in investing. PMA works hard with new clients to help them assess the right level of risk for their portfolio. We are also always available to existing clients who wish to consider whether now might be a good time to reconsider the risk level they have selected.


* For additional information – see slide 16 – https://advisor.mp.morningstar.com/resourceDownload?type=publicForms&id=3f9dff3c-f085-47a1-98ba-0bc008df9f25