With all the uncertainty in the world today it is more difficult than ever to divine what the future holds. Economic, political, and health uncertainty (to name a few) have dominated our lives in 2020. As capricious as today's environment may seem, uncertainty is one of the very few constants in life. As such, it is important to understand how to navigate the uncertainty while still moving forward.
As a parent of two young children, I know all too well how untrained human nature reacts to unknown events, and usually, it's not good. For example, trying to convince a child to taste an unknown food usually ends badly (at least with my kids!). Their brains have not yet learned how to deal with uncertainty, so they do not, they simply refuse. Fortunately, as we evolve, we learn to deal with uncertainty in a much more mature way. How does this happen?
We handle uncertainty better than children because we learned how to make best guesses as to the possible outcomes and the impact those outcomes have. For example, a child may dig in their heels when asked to try a new food because they don't know what it will taste like. On the contrary an adult subconsciously realizes the most likely potential outcomes: they like it, they don't like it, or they are indifferent. Two out of the three outcomes aren't bad and even if the negative outcome occurs, we know it's not the end of the world, so we try. Kids don't know that yet.
So why is this important for investing? The investment world is rife with uncertainties. But having the knowledge, experience, and wherewithal to run probability analysis on different outcomes allows us to make educated decisions - even in the face of uncertainty. It also allows us to limit risks to levels that are manageable and optimal for our circumstances.
The most important part of building a successful plan is not trying to predict uncertainties, but rather building a plan that embraces uncertainty only to the extent that it is needed to reach long-term goals.
In other words, risks are a necessary part of life, but not all risks are created equal, and not all risks should be tolerated. Using the earlier example, while we know the risk of trying a new food isn't great, the risk of jumping out of a moving plane with only a parachute on our back might make us think differently about future uncertainty. This is a perfect example of the risk-reward relationship in real life.
Our job is to find truth amid all the uncertainty. We must identify the things we know, explore the potential outcomes, weigh those outcomes against the probability that it occurs, and weigh the risks to those outcomes versus your needs and goals.
Yes, the uncertainties are real.
Yes, today's uncertainties appear to carry more weight.
No, higher levels of uncertainty should not revert us to our primal 5-year-old decision-making abilities.
Successful plans assume and embrace times of increased uncertainty, in a managed way. They don't turn a blind eye hoping they never occur.
As we remain in one of the most uncertain times of our lives it is important to remain focused on our goals. If your goals have changed, please let us know, and we can come together to update your plan. Otherwise, we believe that today's uncertainties can create tomorrow's breakthroughs. As always, we will continue to share our thoughts on current events that may have an impact on your success.
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Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™
President, Chief Investment Officer, Principal
240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237
Advisory Services offered through Allegiant Private Advisors, LLC, a Registered Investment Adviser