Uncertainty. Ambiguity. Complexity. It often feels as though the financial world is filled with these three. Jason Zweig, one of my all-time favorite financial writers, gives his take on uncertainty in To Be a New Fool in the World:
“Investors hate uncertainty.” Nonsense! That’s like saying you hate gravity, mortality, or evolution. Only fools hate uncertainty.
Investors accept uncertainty as the fundamental substrate of the financial markets. Anytime investors are “certain” about anything, they are probably wrong.”
The more I look around, the more I disagree with Jason. This is rarely the case. Yet, the human condition is to hate uncertainty. A quick Google search of the top fears among Americans lists public speaking, flying, and death as the top three. We fear the unknown. Just look at the DALBAR study year after year (remember the chart below from two weeks ago) and see where investor returns rank compared to almost all other asset classes—it’s abysmal. Clearly, humans would rather be wrong than be uncertain.
Or perhaps this graph of US mutual fund and ETF flows from Peter Mallouk of Creative Planning better illustrates the point:
To be clear, this means investors pulled massive amounts of money out of the stock and bond markets as the market fell. All too often, gains pile up right after the money goes out. Investors seemingly know this, yet at the first sign of trouble, there’s a “flight to safety”—a phrase that somehow makes abandoning the best wealth-creation mechanism in the world sound like a positive move. Many of the stock market’s best individual days occur when things look and feel most bleak. It will pay to keep this in mind for when the next inevitable drop comes.
Two of my favorite quotes on this topic:
“Those who can live with ambiguity, and still function, do the best. Those who can’t stand uncertainty get their certainty but pay for it.“ – Herbie Cohen
“If you can’t stomach 50% declines in your investment, you will get the mediocre returns you deserve.” – Charlie Munger
A fun juxtaposition: As it relates to one’s own affairs, most people would rather be wrong than be uncertain. However, we love watching others deal with uncertainty.
Sports, gladiators, reality TV, and debates are great examples. Humans consistently pay to watch others deal with uncertainty. So, if most folks will pay large amounts to remove uncertainty from their own lives (investor vs. market returns, annuity sales, fear of public speaking), and will simultaneously pay to watch others deal with it for entertainment, you’re sittin’ pretty if you are one of the few that effectively thrives in those uncertain situations. It can provide tremendous fulfillment (likely because it’s challenging) and monetary rewards.
But what about for the rest of us mere mortals? How about this: if we can nudge our instinctual view on uncertainty from avoidance to acceptance, that just might make the difference! Please note that I used the word “acceptance” for a reason–don’t expect to be excited the next time the market plummets 20%. It’s okay to be fearful when others are fearful—just don’t let your emotions and investment decisions have a playdate!
CONSIDER:
3 Thoughts from Seth Godin:
“Life is projects, it is not a job.”
“You don’t need more time. You just need to decide.”
Perhaps most important, because it highlights the importance of quality, personalized financial planning:
“Make the agenda, invent the possible paths, tell us where we’re going next. Life is an essay, not a Scantron machine.”
–
Let’s get after it this week!
Brooks
Brooks Palmer, CFP® is Head of Investments at Root where he helps identify, evaluate, and implement the best investment solutions tailored to clients’ needs. In Full-Court Press, he breaks down what’s happening in the markets—cutting through the noise and jargon—while connecting it to Root’s core investment tenets so you can make the most of your money and your life!
