Investors are always seeking greater certainty; we all want to know what the future holds and make the best decisions today for a better tomorrow. This desire stems deep in our physiology. The brain may consist of a lot of gray matter, but it hates gray areas. It wants certainty and rewards us with great peace when we find it.
The challenge is that much of the future, especially in investing, is inherently uncertain. Therefore, when we feel more confident about something in the future, such as the economy or stock markets, it is merely a feeling or perception of the future, which can be incorrect.
Feeling More Certain or Uncertain
Recently, The Wall Street Journal highlighted a few investors who “threw in the towel” in March, opting to go to cash. The common reason behind this was that the investors believed the future was more uncertain, so they would wait for a more certain time to reinvest. But is the future more uncertain now than at any other time, or is it just our perception or feeling about certainty?
Investors felt quite certain in December of 1999 about the potential for technology. Not only were they fully invested, but they were leveraged. That great certainty about the future lasted only a few months, and then came one of the biggest crashes of our generation.
In January 2020, investors and experts alike were very certain about the economy and markets for the year. But then COVID shut down the global economies. We felt certain, but the uncertain happened.
The Benefits of Uncertainty
When we are certain about a future outcome, we may take on more risk than we are prepared for – simply because we don’t see it any other way. Conversely, when we are uncertain, we tend to be more cautious. We tend to plan more thoughtfully and extensively for our future. We employ diversified strategies because we don’t know what will do well.
While uncertainty can be a very uncomfortable feeling, we can embrace it as investors because it helps us make more prudent and discerning financial decisions. After all, the future is uncertain – whether we like it or not.
Stay relentless,
Scott
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
©The Behavioral Finance Network