Markets are always uncertain

By in Behavior Corner, Dimensional DFA, Multi-media

Markets are always uncertain. Actually, as the article below states, markets aren’t uncertain … uncertainty is a human condition that is emotional and the markets simply reflect this emotion among the many other emotions market participants feel.

I like to schedule posts in advance. You’ll notice the article below is dated May … when the S&P500 and Nasdaq indexes have closed at record highs and the DOW very close to its’ high too. The emotional tension then was between those who felt markets were uncertain and could go down because of those highs, and others who felt uncertain about all the good economic news suggesting markets could still improve. That tension always exists – whether markets are trending up or down.

Now in September we know in hindsight what has happened – that that biases us to think we know how the future will play out with the same certainty we have about knowing what happened in the past.

We don’t know the future since it is the future that is uncertain – the past is already written and certain. Plans, and investments supporting those plans, must be made with uncertainty in mind and sticking to a well made plan during uncertainty is how one reaches their goal.

As David Booth says in the article below in answer to the question “How long do I have to wait for an investment strategy to pay off?” “At least one year longer than you’re willing to give.”

PS. This goes in a sense to believing that sequence risk “goes away” over time too. Markets are always going up and down, with trends either up or down as well. How this belief of “going away” manifests itself is primarily by interpreting simulations incorrectly at the end of them, where balances have ballooned large enough relative to spending, so that market downturns don’t matter. Because at this point, assuming such large balances, the spending regime is assumed to be lower than what could be spend based on that higher balance. In other words, either over saving or under spending relative to what may prudently be spent given those balances and the remaining longevity estimates.

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PPS. In the interest of disclosure: I do use Dimensional sub-managed SA Funds with most clients (not a fund requirement, but a business standardization decision I’ve made because of the evidence based approach).

Analogies that explain the difference between investing and planning (Yes, they are different)! :

This blog is not a solicitation; simply an explanation of the basic philosophy and approach.

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