Who’d have thought…

Given all of the dire economic news of late it is hard to rationalise why global stockmarkets have performed so well.

As most of you will be aware we have been enjoying a long, if rather unanticipated, stock market rally. I am not trying to call the market when I say this, as I think the stockmarket should do very well over time, but nearly every bit of news we’ve had over the past four years would seem to suggest this rally would be impossible.

It has occurred in the face of high unemployment, a declining pound, low consumer confidence, huge deficits, wars, political unrest here and abroad, a nuclear disaster (and tsunami) in Japan, a poor housing market and more.

But I get the sense that as financial markets continue to advance, investors are waiting for markets to hit the buffers…

It is hardly surprising given the constant stream of negativity out there that seems to threaten our daily lives. It may be a fear of losing your job, a fear of losing certain benefits we are receiving, a fear of not being able to buy as much of the stuff we want, a fear of higher taxes, a fear of your kids and grandkids having no chance to go to university or ever finding a job. The world just seems to be a riskier place nowadays.

This fear of loss in the face of uncertainty is one of the most powerful emotions we encounter. It is also the most expensive…as it subconsciously drives how we spend money, make investment decisions and discuss finances with our partners.

While the natural tendency is to try and eliminate uncertainty, we’d be better off learning how to live with and plan for uncertainty. Eliminating uncertainty requires an ability to predict the future with precision and accuracy, which is an impossible task. Human beings, politics and markets are inherently unpredictable on their own. As the father of Taoism, Lao Tzu, concluded: “Those who have knowledge don’t predict. Those who predict don’t have knowledge.”

Instead the best planning and investing strategies do not require us to make perfect decisions every time. We don’t need outsized returns or to buy everything at the lowest price, or to get the highest possible interest rate on our savings accounts. Instead we need consistently good — not perfect — behaviour over long periods of time. It requires us to take some things with a pinch of salt and it requires us to acknowledge that it is far better to be approximately right, than run the risk we could be precisely wrong.

The source and inspiration for this article was the one that originally appeared in the Minneapolis Star Tribune on November 5, 2012.

‘The value of investments can fall as well as rise. You may not get back the original value of your investment’.