Stress Created By Uncertainty

In general, I try to avoid talking about market forecasts (guess-casts) because you absolutely CANNOT afford to risk your financial future on someone’s guess about the future of stock market returns. But I’m going to break my rule because I’ve had so many people ask about this recently that I think we need to talk about it.

In the last 10 days there have been two, wildly divergent “guesses” that have received a lot of attention in the media. (If you haven’t seen them, and that would be a good thing, forget you opened this newsletter and go back to what you were doing so you don’t waste any time on what I am about to talk about.)

Bob Pretcher thinks that the Dow is going to 2,000 and that guess was carried to our homes by major “news” channels. Within a few days, Jeffery Hirsch proclaimed that we are about to enter a “super boom” that will take the Dow over 38,000 . So the question is what do we do with that kind of information? How does a rational, intelligent person consider all the available information and determine an appropriate course of action?

It doesn’t make sense to simply ignore all information about the investment environment, but the real difficulty comes in trying to distinguish the signal from the noise, and when it comes to the direction of the stock market, it’s almost all noise. Almost all guesses. Almost all wrong. So back to the question: what do we do with all the information?

It’s important to understand that part of investing (and maybe life in general) is making decisions in the midst of uncertainty. We will never be right all the time. The key might be in understanding that it’s the process of making the decision that we have control over and not the outcome. So we have to approach investment decisions as a continual process of making a decision based on available information, watching the outcome, considering new information as it becomes available, making course corrections and repeating over and over. I have also found that when we are faced with high levels of uncertainty and extreme ranges of potential outcomes it helps to think about the impact following one path would have and then taking the more conservative path.

In other words, at times of uncertainty, chose the option that has the lowest range of outcomes. I have found the following questions helpful:

[1] If I act on this new information, and it turns out to be RIGHT, what impact will it have on my life?

[2] If I act on this new information, and it turns out to be WRONG, what impact with that have on my life?

I think you will find that just forcing yourself to consider the potential outcomes of being wrong will result in making much better investment decisions. Now with all that out of the way, please consider your investment process and determine how much it might impact your life if some of the major assumptions are wrong and make changes where necessary.

This sketch and post originally appeared in the Behavior Gap Newsletter. Sign up for your FREE subscription.