I saw a Tweet recently from Thinking in Bets author Annie Duke, saying that an affirmative answer to the question above requires an amount of certainty that is unreasonable. Instead, she suggests the question should be “how sure are you?” as this acknowledges uncertainty and recognizes shades of gray. I think she’s right.
Investors want to fully resolve uncertainty within their financial life and while that’s understandable it’s also a fool’s errand. Investors make poor decisions every day by investing in products that promise to remove uncertainty. The real question is even if you could remove uncertainty (you can’t), what’s the cost? Are you sure?
Investors Forget the Bad Times
Investors often make errant decisions when trying to create certainty out of whole cloth. These choices are usually based on a combination of what they remember and what they expect. It’s common to remember mostly good investing experiences while forgetting the bad. In other words, we forget how this turned out the last time we tried to control the universe. Academics call this “self-serving memory bias” and it can prove very dangerous.
Uncertainty is part of everything we do. Uncertainty can quickly fold over into fear which is a physiological aspect of our human condition. Generally, we associate fear as a protective response associated with the prospect of danger or loss. Within the investing world, however, the fear of being left behind or missing out can be even more damaging.
I can recall numerous meetings a dozen years or so ago where clients expressed with certitude that real estate prices would always increase unlike their investment portfolios which sometimes decreased. Are you sure?
Look to the Future
Since investing always involves looking to the future, the entire process is wrapped in uncertainty. That’s the bad news. The good news is this same uncertainty is the proximate cause of investment returns. Ultimately, you need the uncertainty; you need the returns.
The real problem, however, is the way investors view uncertainty. Market history tells us that broadly speaking, a mixed portfolio of stocks and bonds has grown at about twice the inflation rate over the past half century or more. It’s within reason to expect this going forward. That’s years into the future and precisely the way market wealth should be considered. Financial market history also teaches us that next week or next month 20% or more of that wealth could be temporarily erased and the chances are good this will occur at some point.
Don’t Get in a Pickle
Investors get into a pickle when they think of their future wealth investments as present wealth. By mentally discounting much of your investment portfolio as something only available for the future, you are taking a big step to protect your future wealth. Unless you are fully retired, current expenses should be met by other means, not by your long- term investment portfolio.
One of the indirect benefits of thinking about investments as supporting your future needs is that you can let loose of worrying about the latest news. This creates space for you to spend time on what you want today.
Uncertainty can’t be eliminated. Therefore, your best strategy is to let it help you instigate future wealth. Start there. Ready for a real conversation?