Don't Let Uncertainty Paralyse You
At heart, ‘uncertainty’ and ‘investing’ are synonyms.
In 1927, German physicist Werner Heisenber stated that the position and the velocity of an object cannot both be measured exactly at the same time. This meant that there was no way to predict the outcome given the initial starting variables; there will always be uncertainty.
Investing is very much the same. We invest with an expectation of a certain outcome, but very often we achieve an unexpected return. The real return that we will get every year is uncertain, but we continue to invest anyway because we are optimistic about the ingenuity and resilience of the human race.
For instance, the long term average return of a globally diversified basket of stocks (benchmarked to MSCI ACWI in SGD) is around 7.1% per annum. Hence, we invest in this basket expecting to receive that corresponding return every year. The returns that we do receive however are often very far from that expected figure. For example, last year smack in the middle of the pandemic, global stocks gave us a return of around 20% shown in the chart below. The 12.9% above the expected return may have been a surprise, but it is most certainly welcomed.
In 2022 we invested in the same basket of stocks, expecting that 7.1% return yet again while having no idea what the end outcome will actually be. With the conflict involving Ukraine underway, economic responses — including sanctions — have led to market turmoil and anxiety about what may come next. As investors, we are bound to get worried when we have no reasonable grasp of an uncertain future. To provide some financial perspective to the conflict happening today, the list below shows the geopolitical events and the corresponding market response over the last 120 years. The resolutions of those events and their response can provide us with some measure of hope.
As the table shows, it doesn’t take long for equity markets to recover from initial sell-offs in response to these events, as catastrophic as they may be. The only instances in which markets continued to be depressed for extended periods were when these events occurred in tandem with a recessionary environment. While it is natural to be fearful and concerned during such periods, it doesn’t pay to panic-sell and hold abnormal amounts of cash as bigger issues loom on the horizon.
Inflation, already accelerating to the highest it has been in decades, may possibly climb further still, as the supply of goods from the region is constricted. Higher energy prices coupled with a potentially more challenging business environment owing to the conflict could make things more expensive in the long run. Staying in cash when inflation is high can be detrimental to your spending power in the future.
Don’t let the inherent uncertainty in the world paralyse you from making better decisions about your money. While staying in cash can bring you short-term comfort, it is not ideal during this period of high inflation. When it comes to market responses, other factors (like inflationary pressures) are arguably more important than geopolitical events which markets have historically recovered from quite quickly. If you feel concerned about the investing environment, or just want someone to give you a second opinion on whether you are doing the right thing with your assets, don’t hesitate to come and talk with us.
