Investors often grapple with the challenge of achieving their long-term financial goals while avoiding the anxiety-inducing rollercoaster of market volatility. They naturally prefer to participate in the market when it’s on an upward trajectory, but this desire for one-sided certainty can lead to misguided actions and decisions.

Investors frequently pose the question: “Will the markets go up or down”?  Unfortunately, many are uncomfortable hearing their financial advisors respond with the honest admission of “I don’t know.” Uncertainty is a concept that humans instinctively dislike; it introduces fear and discomfort. As a result, people often seek false assurances or a sense of control, even when such certainty is based on an illusion.

So, what do we truly know?

• While the stock market generally trends upward over time, it does not always go up.
• Avoiding exposure to the market when it’s rising can prove to be costly.
• Markets tend to rise approximately 80% of the time.
• The price of missing out on these gains is a significant cost in the longer run.

 

In the realm of investing (and coincidentally also in marriage), two phrases should be commonplace but are surprisingly underused:

• “I don’t know.”
• “I was wrong.”

 

The honest answer (“I don’t know”) will result in less stress when you realise that you do not have to have all the unknowable answers about the future .

“Instead of forecasting an unknowable future, it can lead to more productive activities, such as asking different questions and finding better answers.” – Mike Hall (Sapient Capital)

If you accept that the future is inherently uncertain, you should find comfort in embracing your own uncertainty. This paradigm shift in perspective can foster candid discussions between financial advisors and clients, ultimately leading to more practical plans of action.

This acceptance of uncertainty can profoundly affect your composure. Rather than expending time and energy on predicting the future, you can relinquish that burden and focus on aspects within your control.

Morgan Housel (author of “The Psychology of Money”) proposes three possible investment strategies:

1. Being smarter than others.
2. Being luckier than other investors.
3. Being more patient than others.

Out of these, being patient and adhering to a long-term strategy is the only approach over which you have absolute control. It’s crucial to recognize that no amount of planning can completely eliminate all risk. Attempting to control the uncontrollable can become problematic when fear takes the reins of your decision-making process.

In the words of Mike Hall, “This job is hard enough without predicting the future too. Here is what I have decided: I don’t know. I can’t predict. I prepare.”

The smartest answer in investing is often the most honest one: “I don’t know”.

Embracing uncertainty can lead to more fruitful conversations, sounder decisions, and a greater sense of control over one’s financial future.

 

The above article was written and adapted by Marius Kilian.

Sources

*“I Don’t Know”, Mike Hall, Sapient Capital, Post 20 Sept 23