Investing With Uncertainty

It’s one of the most common things I hear from investors: They are reluctant to invest because they don’t know what’s next.

Uncertainty: It’s the bane of investors’ existence.  It’s also the pervasive background of the investors’ landscape.

The last ten years have seen an endless stream of investor concerns:

  • Double-dip recession
  • Federal Reserve policy and hyperinflation
  • European debt crisis
  • Greek bailout
  • US debt downgrade
  • US government shutdowns
  • Negative interest rates
  • EU breakup (“Grexit” and “Brexit”)
  • Trump election
  • Trade wars

There are many more I have missed.  Despite the uncertainty caused by each issue, all have been largely brushed off by the market.  The S&P 500 has risen from the ominous intraday low of 666 on March 6, 2009 to over 2800 today, a gain of over 320% in ten years.

Some of these concerns sparked market sell-offs for a period, including the recent 20% decline late last year.  Each previous time the market rebounded, and the current recovery continues with the market just a few percent off all-time highs.

There are many lessons to take away from this, but I will highlight two: 

  1. There is never certainty.  There is always uncertainty.  You can never invest if you wait for certainty.
  2. The financial industry and the media will always find some way to scare investors.

Admittedly, the financial industry and media are biased on the bullish side (for a great history on this, read Bull: A History of the Boom and Bust, 1982-2004 by Maggie Mahar), but as the old saying goes, “Generals always fight the last war.”  The previous decade saw stocks crash as we entered the Great Recession and it looked the financial world was coming to an end.  The prior decade saw stocks crash as the Internet bubble burst.  With this in our rear-view mirror, investors naturally look down the road towards what might cause our next crash. 

The reality is no one knows the future.  We can always come up with some reason to be nervous today.  Look at the above list of concerns – each of which was (and many still are) discussed and belabored by the media and professional investors – and stocks have blown right past all of them.  If you wait for the skies to clear, you’ll never invest.

I’m not recommending everyone get “bulled up” and invest with abandon.  Don’t believe the hype, but don’t buy into the doom and gloom either.  Understand that there is a continuous flow of information hitting us every day that creates uncertainty and doubt about our investment strategy.  This is permanent part of the investing landscape.  The investor’s job is to develop a strategy they are comfortable sticking with no matter what the future brings.

The best way to deal with uncertainty is to own at least some investments in a broad based, diversified portfolio (index funds are a good option) and set an asset allocation that matches your risk tolerance.  This will not eliminate risk but set your exposure at a palatable level.

If investing beyond the index, be selective and understand what you own.

There will always be uncertainty and reason to fear.  Find strategies to deal with uncertainty rather than be paralyzed into missing out on potential gains.