BY KENT KRAMER, CFP®, AIF®, Chief Investment Officer, Foster Group
“…but in this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin
You and I may not enjoy uncertainty, but it is our reality in virtually every area of life. Whether we are considering our personal health, projecting winners and losers in elections and sporting events, forecasting weather patterns, anticipating travel delays, or predicting the performance of financial markets, there are no 100% reliable indicators of what will happen today, tomorrow, next year, or in the next twenty years.
We know this to be true, but we still wish we could predict the future just a little bit better.
Academics who study human behavior, from psychologists to economists, agree that the human brain is a prediction machine. Over thousands of generations, humans have learned to recognize physical threats and take precautions to ensure survival. Our fight or flight reflexes are what has kept us alive as a species. We predict which threats put us in mortal danger, and we choose between two options: Do we run, or do we stay and fight?
If you watch and/or read the news, you could understandably be very worried that recession or something worse is right around the corner, that the stock market is poised for a big fall, and that government tax and fiscal policy (regardless of which party you prefer in 2020) is about to run our country into a deep hole of our own making. Yet, if all this danger is so obviously right around the corner, why are stock markets in the US at all-time highs and economic indicators like unemployment rates, corporate earnings, and wage growth all trending positively? There are two competing stories out there. One is that the economy is doing well. The other is that the global economic recovery is past its prime, and the recent yield curve inversion means recession is certain.
So, what is your prediction machine telling you to do?
Top chess players have moved away from a strategy referred to as “combination chess” to one called “positional chess.” In a purely combinational approach, the player tries to envision as many future combinations of moves by his opponent as possible, predict which ones are most likely, and then move in anticipation of those combinations.
Positional chess acknowledges that anticipating every possible move or combination of moves is a vain effort. The potential number of combinations is too large and too unpredictable. I don’t know with enough certainty what my opponent is going to do. So, the positional player sets up his or her board and moves their pieces with a strategy that allows them to respond effectively to the opponent’s moves as they become known. Positional players prepare so that they can play offense when opportunities present themselves and play defense if things go against them in a series. The positional player is embracing uncertainty.
Good, long term financial plans and investment strategies are akin to playing positional chess. We hear the “news,” which is full of stories and guesses as to what combination of events will happen. But rather than choosing one prediction to act on, we prepare our plans and portfolios to play defense when circumstances turn negative, as well as being in position to take advantage of opportunities when they present themselves.
We may not like uncertainty, but we need to understand and embrace it to keep ourselves positioned for both survival and success.
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| Kent Kramer