The Role of Uncertainty in Investing (And in Life)

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Today, I was thinking about what topic I could share and what I really thought was it’s essentially repurposing something that I wrote recently and it was at a request. Essentially the topic that I wrote for talked about the volatility of the market and what should people who are retiring soon do. And it’s kind of a teed up thing but as most of you know who’ve been listening for a while, my take and my perspective on finances as well as our guys is totally against the grain. Looking at what the common response would be, which is write it out or do proper asset allocation, hire a financial advisor, use funds that have lower fees and the advice is all the same.

Most of the financial advisors that are out there are working for brokerages, they’re working for investment houses and they’re taught what to say and they’re taught what to sell. And you see time and time again the same advice and you really look at the same pitch and it gets old. So I kinda take a different angle on it so what I’m gonna do is I’m gonna read through my response and I’d love to hear your feedback. But I’ll read my response in regards to a volatile market and if you are retiring soon and then I’ll make some comments toward the end. 

So let’s get going. What people should do is most likely not what they’re going to do. Volatility isn’t some recent phenomenon. People did in the past is what they’re most likely going to do in the future. The next wave of volatility will happen and it’s going to be bigger than ever before. It could be triggered by any number of events, deflating of the asset bubble which has been fueled by the central bank’s multiple stimulus efforts, it could be China’s massive debt debacle coming home to roost (oh wait, that’s already happening or that’s already begun). It could be the deluge of baby boomers hitting 70 ½ years old and forced to sell their securities because of the RMBs and the list of triggers goes on and on.

Here’s why Americans won’t do anything until after it’s too late, it boils down to what people need and how people act. I will give you a hint, it’s a paradoxical dance. Here’s a famous financial saying that is almost 100 years old and it rings through today, it was by famed economist John Maynard Keynes. He said markets can stay irrational longer than you can stay liquid. He knew almost firsthand by almost bankrupting his currency fund in 1920.

So what do people want? Human behavior is typically influenced by needs. Two of the basic ones are certainty and uncertainty. People want safety and security which is (certainty). But life would be boring without variety and excitement which is uncertainty so how do people act?

The stock market is the perfect environment for those two needs to manifest and Wall Street knows it. Subsequently, this is why tens of trillions of dollars of American wealth is in so-called savings plans. People see the word “savings” and feel certainty so that is why they allocate a big percentage of their salary to a 401k. Plus that’s what everybody else is doing so they feel safety in numbers. I did put it in there but safety in numbers. Just because it says “savings” doesn’t mean that is savings. This so called “savings” is tied up in whichever of the 7,500 mutual funds that are traded on the exchange. There is a sense of excitement knowing that your money could earn a financial guru’s proclaimed mythical 12% historical return. The risk and the promise of such a payout is exhilarating and fulfills a need of uncertainty. The role of uncertainty in investing is vital.

When the volatility is triggered, emotion is a result, and an irrational behavior follows. The result, everybody buys at the top (which is greed and gain emotion, which is uncertainty) and then sells at the bottom (fear of losing more emotion, or certainty). My advice is that if you’re retiring soon and before the looming volatility starts to get worse, take some time to educate yourself about what you have, where you are and what your options are. There is no excuse today, the information is everywhere. My 20-month old can navigate my iPad and can’t even read yet. Focus on your non-market based options or the non-rhetoric based options as well as the counter argument to the financial plan that almost everybody has, this will give you both sides to properly weight pros and cons. Hint: there are financial tools and vehicles that will outperform what most people have but your need for certainty is going to have to outweigh your need for uncertainty.

Okay, so that’s the end of the column so I’ll make some comments. So really look at this idea of certainty, right? We all strive to have certainty, safety, we want a roof over our head, we want something that we come home to and it’s routine and it’s known. And a lot of people strive for that in their work, they strive to get out of debt because they’re afraid that they’re not gonna have a job to be able to pay off credit cards or pay off debt. People want certainty which is a safe and secure job with benefits so that if something happens, they’re okay. I can go on and on with examples but that idea of certainty is profound because there’s so many things that push us to gain that. But at the same time, it’s not the only need that we have, we want variety and, I mean, goodness, today, in our day and age, there’s variety everywhere, we have variety in restaurants, we have variety in drinks, we have variety in computers. There’s so much out there that we could do entertainment-wise, there’s movies and there’s games and video games and the list goes on and on as far as uncertainty is, there’s a lot of variety that we strive to have. But in that variety, I also think that this idea of being exhilarated especially when it comes to taking risk, right? This uncertainty of taking risk. And a lot of that exists in the market and I have, a number of our clients, they use their vehicles and tools that we provide to really have this safety and security met. But this doesn’t mean they put everything there, they have other investments, they have other things that do give them that exhilaration. Now that’s not what I do but I’ve heard story after story after story of this idea of investing and buying this put or buying this odd and hedging with this and doing these strategies and I’ve seen people literally lose their entire balance and it’s profound because really pushing, what’s pushing them is that idea behind uncertainty.

Now looking at uncertainty, I’m not saying that it’s bad, it’s not bad, it’s just what it is. I think if you’re able to recognize what your needs are, you’re gonna be able to properly mitigate your behavior because in the end if those aren’t balanced then you could as I said in the article or the response for this media person’s topic, it’s one of those things where people, because they’re not prepared, because they pursued uncertainty and it’s not balanced that they end up making terribly emotional decisions and most of those decisions are irrational. And I always use kind of the logic of, in hindsight, everything’s rational. But looking at decisions in the moment especially when there’s emotion involved, it’s typically not rational.

So again, these two kinda core needs are really important so what I would say is you really have to look at where your position financially and what’s driving you. If driving you to safety and security, build that bucket, build your start over account, build the bucket that is not gonna lose money, it’s gonna give you gain, it’s gonna give you liquidity, it’s not gonna have penalties associated with it, it’s your fallback. And we often say to clients as we go through our consultations is listen, you don’t have business putting 100% in here, your money in this row, 100% of your money in that because that right there is, you’re not fitting those needs and really hitting the certainty and safety bucket is primary then the uncertainty in my opinion doesn’t have to be taking risks, you can meet that need so many different ways.

This blog was created based on our podcast with Patrick Donohoe. Click here to listen to it now!

The Role of Uncertainty in Investing (And in Life)

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