Staying the Course Amid Pullbacks and the Folly of Predictions

During times of heightened volatility, as we’ve seen throughout 2022, The Mather Group, LLC (TMG) aims to share a perspective that is grounded in a long-term, evidence-based view of the facts. We strive to be a voice of reason that helps clients remain calm, since we believe one of the biggest mistakes investors can make is to emotionally sell and lock in permanent losses during moments of stress.

As a reminder, bear markets and other pullbacks in the market are completely normal, though unpleasant. They are also the price that is paid for higher returns over time. As the chart from BlackRock in TMG’s Second Quarter 2022 Market Commentary showed, it is reasonable to expect many bear markets over the course of a lifetime. These market pullbacks can be longer than expected, historically ranging from 3-34 months on the way down, with longer recovery times. However, the subsequent bull markets lasted even longer and generated tremendous wealth for investors who stayed the course.

In fact, during the past five-worst declines for the S&P 500 Index, the subsequent five-year recoveries were very strong, as shown in our June 2022 article, Perspectives on Recent Economic and Market Events.


An important point needs to be reiterated about this historical analysis. If an investor was not able to stay invested through a prolonged bout of volatility and they missed a handful or more of the best days in the market (which often took place during periods of pain), their subsequent returns were substantially lower. We also believe, and various studies* have supported, that this is more likely to occur for investors who go it alone. 

Knowing this, we focus on helping to ensure that clients aren’t impacted by common pitfalls related to market psychology. When markets are going up, investors tend to get greedy and can take on too much risk while trying to chase high returns. Recency bias—placing disproportionate emphasis on recent events (in this case, upwardly mobile markets)—contributes to this misguided behavior. In reality, bear markets and other market pullbacks are often part of the investing experience that we must withstand. When these occur, we coach clients to avoid the temptation to reduce losses by withdrawing from the market. Again, market cycles are normal; we know that downturns will eventually be followed by upturns. So we rely upon historical evidence and our knowledge of behavioral finance to steer our clients away from emotional, short-sighted decisions.

Opposed to timing the market, we believe the best course of action is to ride out the storm and to proactively respond through rebalancing (potentially buying undervalued investments), tax loss harvesting (helping with tax efficiency), and pursuing strategies like Roth conversions where appropriate, so that clients can reduce their taxes in the short-term and also enjoy more tax-free growth in the long-term as markets recover.

Despite reiterating our evidence and beliefs, some insist that market pain can be predicted or prevented, pointing to outlier examples of an investor or strategist who got lucky timing both their exit from and re-entry into the market. However, as the following examples will illustrate, even those regarded as experts on the economy and markets have little to no valuable insight about the future when it comes to predictions. 

Take the Federal Reserve (Fed) for instance. Many of us remember that just a few years ago, the Fed was worried about not being able to generate enough inflation, and in fact, was willing to overshoot their 2% long-run inflation target. Obviously, they were unable to predict an upcoming pandemic, war, and supply chain disruptions, but they more than met their target with the Consumer Price Index (CPI) at 8.3% year over year as of the recent reading. 

Now they have reversed course and are hiking interest rates to attempt to tame inflation, which has contributed to the recent market downturns. If they could misread the situation before, it is entirely possible that inflation could fall faster than they expect, necessitating rate cuts. So, we view the Fed’s ability to control inflation as the illusion that it is, though their decisions must still be monitored due to the impacts that eventually flow from them.

Complicating matters, the following chart from 2019 shows that markets aren’t good at predicting Fed actions either. Fast forwarding through time, we know that the 10-year Treasury note yield ended 2019 closer to 1.5%, showing how incorrect these expectations were.