The companion video for this piece is available for viewing here:
From a wealth planning perspective, today may seem more uncertain than ever. Rising inflation! COVID resurgence! Political partisanship, including unclear tax policies! Not to mention climate change, and greater influence from China.
All that, and with little apparent margin for error in markets. Bond yields remain incredibly low (limited upside? greater downside?), and “risk on” valuations appear historically high—particularly in areas like tech, ESG, or crypto.
We provide our latest market comment here, so this note will simply focus on the concept of uncertainty from an investment perspective.
When it comes to uncertainty, we follow two principles today, and every day:
- The future is always uncertain. Today is no more uncertain than usual.
- The best way to navigate uncertainty is through balance and maintaining options.
Regarding our first principle, every year has the potential for major surprises. Sometimes they materialize, and sometimes they don’t. There’s no way to know.
What may be unique to today is that people are hyper-focused on the uncertainty itself and therefore FEEL it more than usual. Uncertainty creates anxiety—fear that the market will go down.
The truth is that the stock market experiences significant surprises frequently. Since 1980, US stocks have averaged a decline of almost 14% at some point during the year, while still averaging a full-year return of a little over 13%.
More to the point, stocks dropped 27% or more in six of those 30-odd years. That’s one year out of every five! Notably:
- In three of those years, the market ended up positive for the year.
- Two of the remaining three cases saw meaningful gains the following year.
Our point here is not to create a false sense of security. Market volatility is scary. Our point instead is that volatility—a key indicator of uncertainty in markets—is common. And markets do generally handle the surprise and the volatility, with time.
On a year-to-year basis, we believe you should always consider markets to carry significant uncertainty.
The Best Response
The best response is to NOT respond to headline uncertainty.
In periods of uncertainty, its human nature to become anxious. Humans tend to look for comfort and confirmation. They want to make a decision so that they feel in control. The problem is, these decisions are usually emotional and counter-productive to investment goals.
Navigating uncertainty—and inevitable market volatility—requires understanding your comfort with risk, your long-term goals, and your near-term obligations… long before surprises and the unexpected happens.
And since predicting when those surprises occur is impossible—all we can know for certain is that surprise occur frequently and often inconveniently—the best line of defense in our view are the principles of diversification and rebalancing toward risk targets.
Markets are inherently volatile and can ignite powerful emotional responses. If you struggle with uncertainty, let us help you develop a suitable plan that can keep you on track with your goals.