Weather forecasting has greatly improved over the last 40 years – doppler radar, better projection models, tornado and hurricane warning systems – but it doesn’t always feel that way, right? Even with all of the best technology available, it still seems like it will rain on a day that was supposed be sunny or you will need a jacket on a day that was supposed to be warm. But I would argue that this is not the fault of the weatherman, but it’s actually a limitation of how we perceive the world. Human beings just don’t handle uncertainty very well, and weather is inherently uncertain.
The same argument can be made for the stock market. We have exponentially more information about publicly traded companies than the experts had 40 years ago thanks to computers, self-directed tools and requirements for corporate transparency and disclosures. And yet it is still so hard to know what is going to happen next in the market. We look for the experts who sound confident and pretend to know what is going to happen next, but nobody is holding them accountable after they are wrong. Very often, the market news shows will feature two experts who are equally confident of two different and completely contradictory scenarios playing out. What is the investor supposed to do with this?
For the weather and the stock market, I believe we have to embrace the uncertainty. We need to accept that we don’t know for sure what the market is going to do next quarter (or whether it will rain next week), and think of these questions in terms of probabilities instead. Reject the experts who speak in false absolutes and listen instead to those who talk about both the potential and the risks in order to make a more informed decision. This is an argument for diversification – since we don’t know whether domestic stocks will continue to outperform international stocks or not, it makes sense to hold some of both. And just because both domestic and international stocks go down in the next period, this doesn’t mean that our reason for holding them was invalid and we should sell. In fact, it might mean it’s the best time to buy!
Despite the uncertainty, there are longer-term trends to which we can anchor ourselves during difficult times. It may snow in April, but history has proven that the warmer weather is coming soon. And the market may go down again tomorrow but history has proven that it is much more likely to go up than down over longer periods. So, if you are a long-term investor, don’t panic about the April snowstorm, or the rainy day that was forecasted to be sunny. Instead, take comfort in the likelihood that there are warmer days ahead, but bring a jacket along in the meantime, just in case.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.