Uncertainty: A radical way of staying the course

Posted by TEBI on June 24, 2019

Uncertainty: A radical way of staying the course




What are you doing in this market environment? I’ve been asked this question thousands of times, in all market environments. It’s a difficult question because it’s natural to want to do something useful today in preparation for what is to come tomorrow. But today’s market environment may not be tomorrow’s, and if we don’t know what tomorrow’s market environment will be, then how do we do something useful today? It can be maddening. Uncertainty.

There may be something useful you can do. But first, let’s talk about what a market environment is. What do we really know about markets? We’ve observed in the long-term that stocks are more volatile than bonds and earn more, bonds are more volatile than cash equivalents and earn more, and cash equivalents lose ground to inflation. These assumptions are fairly constant in all market environments, including today’s.

Given these rules of thumb, we can create an asset allocation plan based on our long-term financial needs and ability to take risk; implement the plan with low-cost mutual funds; rebalance back to our target allocation once in a while to control risk; and not worry so much when uncertainty is on the rise.

Ah, but we still worry. What if those relationships between stocks, bonds and cash fall apart? Haven’t we heard that market uncertainty is a certainty? Everywhere we turn today, experts are forecasting more uncertainty in stocks, bonds, oil, gold and even the Chinese economy.

Whenever the markets grow particularly volatile, investors understandably want to know where they stand, and there’s never any shortage of market gurus claiming to know the answers on what lies ahead. Should you listen to them? Do their predictions matter?

My first reaction would be, no. It’s not possible to know the future. Listening to the gurus will just confuse and frustrate you. “Stay the course” is the better answer. It’s the one you’ll hear most professional advisers recommend when markets are moving up and down like a roller-coaster. Forget the latest prediction in stocks, interest rates and commodity prices. Just set your asset allocation using low-cost index funds and forget it.

Sound logical? Sure. But does it sound like something you can actually do “in this market environment”? Perhaps not. How does a human being in today’s connected society go through an entire day without hearing about some economic forecast, or China or volatility in the financial markets? It’s not easy to tune out the world.

So, here’s another approach you might try. It’s a bit radical. We’ll call it our “crazy like a fox” idea. Embrace the noise. Listen to as many market gurus as you can possibly stand. Immerse yourself in CNBC and Bloomberg TV. Turn up the volume on Jim Cramer. Get so confused and fed up that you want to throw a shoe at your monitor. Then maybe you’ll remember what you probably already know deep inside: Because future price changes depend on unpredictable human reactions to unknown future events, nobody – and I mean nobody – knows what’s going to happen next in the markets. That’s a good thing to learn.

Our emotions drive a craving for more certainty in our lives, even if it’s sometimes based on a false sense of security. Because emotions run high when markets are volatile, maybe otherwise sensible investors feel a “certainty deprivation,” which leads them to heed false prophets and abandon their perfectly fine investment plans. Maybe an overdose of guru news is the antidote that might help you realize how pointless the noise is, so you can leave your portfolio alone. It just might work.

Whether or not you think that an informational overload may work for you, I hope I’ve made it clear that depending on market predictions is an unreliable way to invest your money. However you can remind yourself of that, so be it. When you can tune out the never-ending glut of financial noise by shutting off all your electronics and reading a good book, your portfolio will certainly thank you for it.


RICK FERRI is financial adviser and writer. Based near Austin, Texas, he runs Ferri Investment Solutions, a pay-by-the hour financial advice service. He also produces the Bogleheads on Investing Podcast. You can follow him on Twitter @Rick_Ferri


More articles by Rick Ferri on TEBI:

Messy funds and the illusion of skill

Points to consider when investing a lump sum

A radical way of staying the course

Just stand there

Six steps to staying the course

Market timing habits die hard


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