‘Uncertainty is underestimated’: Here’s the real reason markets reward those who stay

For most people, uncertainty is something to be avoided or at least minimized. People tend to talk more about the downside to uncertainty than its upside. There is even a term, loss aversion, which describes how a loss can feel more painful than a gain of equal value can feel rewarding.

However, I have a different view: Uncertainty is limited. Without you, there would be no surprises, no joy in watching sports, and no 10% average annual return on the stock market over the past century.

All investments involve risk—there is no guarantee of success. Investors can be rewarded for taking the risk of not knowing exactly how things will turn out. If there was no uncertainty, returns would be predictable and you would have no difference between putting your money in a savings account and investing it in the stock market.

Think back to the beginning of this epidemic. At the end of March 2020, the S&P 500 Index was down nearly 20% for the year. However, investors who stayed in the market were rewarded. At the end of 2020, the S&P 500 Index was up 18.4% for the year, a 38% reversal from its decline in March. March 2020 was a scary time for almost everyone. No one knew what would happen. Yet even in those dark times, I had faith in human ingenuity. When people encounter challenges, they are able to cope and work to solve them. Companies are no different. Investing in the stock market means investing in human intellectual capacity to adapt and innovate.

Because of uncertainty, life is one cost-benefit analysis after another, and we have no choice but to manage risk. At the extreme, some people may try to completely ignore the danger, while others may try to eliminate it. Most of us fall somewhere in between.

We manage risk in our health, work, family, and every other aspect of our lives—including investing—because even though few things are certain, we still have to make big and small decisions. For example, we cannot control the weather, but we can carry an umbrella if it looks like it might rain. And while we can’t predict stock market returns, we can manage the risk in our investment portfolio.

What to avoid

Another way to manage risk is to eliminate some of the things you shouldn’t do. If you want to improve your health, you may eliminate fried foods, soda, and sweets from your diet, which may increase your chances of a healthy outcome. It’s the same as investing. Eliminate bad habits, such as trying to predict the unexpected by trying to time the market or pick winning stocks.

Think about everything that has happened in the last 25 years, including:
• Dot bubble.
• 9/11.
• The Global Financial Crisis and the Great Recession.
• The COVID-19 pandemic.

It would be natural to seek time to exit and re-enter the market. To put the implications of doing so in perspective, consider a hypothetical $1,000 investment in the Russell 3000 Index made in early 1999. This changes to $6,449 for 25 years ending December 31, 2023. At that same time, if you’re over. the leading Russell 3000 week, ending November 28, 2008, the price dropped to $5,382. He missed the best three months, ending in June. 22, 2020, and the total refund amount drops to $4,546. See what I mean?

What to do

Good risk management practices can help you capture the benefits of what scientific research has shown. For health, that means more exercise, regular check-ups, and eating more fruits and vegetables. In investing, that means making sure our portfolios are diversified across regions and asset classes. Although it does not guarantee making a profit or avoiding loss, diversification allows us to reduce our risk while capturing the market’s return.

As we know that risk is inevitable—and the source of investment returns—you want to find the right amount of risk for you. For example, Treasury bills are considered safe investments if their prices don’t fluctuate like stock prices. However, Treasuries have provided, on average, a lower return than the stock market. That trade-off can be tailored to your specific needs and preferences, and it’s always good to be prepared for a range of outcomes. The more you commit to a philosophy and a plan you can rely on when you experience highs and lows of uncertainty, the more likely you are to succeed as a long-term investor.

You are already better at this than you think

You know more about investing than you think you do, because investing is about risk and reward, just like every other part of your life. In investing and in life, some years are better than others, but the important thing is to be patient in order to be ready for the next one. That’s why I see uncertainty as a positive force and have faith in people’s ability to find better ways to manage risk. I have worked with thousands of investors over fifty years in finance and have seen how, when they manage risk better, they live better lives. Instead of trying to predict your future, plan, adapt, and find solutions that make the most sense for you.

You may not only underestimate uncertainty—you may also underestimate the positive impact of embracing it.

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