The Certainty Obstacle

One factor driving the pursuit of perfection in investment is the desire to wait for more ‘certainty’. Yet, the truth is that the world is no harder to predict than it ever was. What we often mean when we say things are more uncertain is that the stories we once used to explain events are no longer valid.

One of the most common statements since the outbreak of the coronavirus pandemic is that the economic and market outlook has become more uncertain. Given that the future is inherently difficult to predict with any level of confidence and we are generally terrible forecasters, can it really be true that the world is now more uncertain?

The environment unquestionably feels more unstable but before accepting the idea of ‘greater uncertainty’ at face value, it is worth exploring the meaning behind such a claim. What we are really saying is: “I was much more confident in predicting the future of the economy and financial markets before that unexpected event occurred.”

We can further expand this to: “I was much more confident in predicting the future of the economy and financial markets before that unexpected event occurred and showed that my level of certainty was exaggerated.”

It seems paradoxical to suggest that things were more certain before something we hadn’t expected happened and upended our prior beliefs. When we say things are now more uncertain, we are usually implying that something has changed which has meant that the future has become increasingly difficult to predict. It has not. It was unpredictable before and it remains unpredictable now. Rather than making the world more uncertain, unanticipated events serve to show us that we were understating how uncertain things were before.

When claiming greater uncertainty in the future, we actually get it backwards. Although we should not conflate greater uncertainty with changes in the forecastability of the world, this does not mean that the notion is meaningless; it just needs to be considered in a different way.

Let’s take a simple example. A person’s range of potential future personal outcomes includes them losing their job tomorrow. This is (hopefully) a low risk, yet it is a possibility. If they are made redundant tomorrow, then their life has taken that specific course. Their future is still unknowable, but the routes and their likelihood from this starting point have changed. Although it feels like their life is more uncertain now, they are without a job or salary, it is nonsensical to suggest that their life was more certain than before it was struck by a risk that they may have failed to predict.

If their life following a job loss hasn’t become more uncertain, then what has it become? More fragile. When we discuss greater uncertainty following a particular event, we often focus on how the shock has left us more vulnerable to future negative events. Since losing their job they are now more susceptible to failing to pay the mortgage and losing their house. There are a range of unpleasant scenarios that are now more likely. This is the same for many businesses through the current recession. The probability of financial hardship may have changed but our certainty in predicting the future hasn’t.

The perception of greater uncertainty is not just about fragility, but how we make sense of the world. When we perceive a sharp rise in uncertainty, we tend to use narratives to explain how the world has become untethered. The cause and effect stories we weave help give us some comfort navigating the randomness and chaotic nature of life. If there is an occurrence that dramatically alters the environment, then the threads that hold together our own explanatory narratives quickly break apart.

The world has not become any harder to predict, but rather the stories we previously used to explain it are no longer valid. As humans, if we cannot construct a coherent narrative, things begin to feel distinctly uncomfortable. To address this, we attempt to create new stories, or simply adjust our previous ones to restore our prior (misplaced) sense of confidence and control.

The very occurrence of the coronavirus pandemic means that any certainty we may have held before was unfounded. Uncertainty always rules, and no one ever knows the future.

The reality is that most people are searching for a level of certainty in this uncertain world – and when it comes to your financial strategy, this is where a good adviser can add significant value by helping you focus on elements within your control to build a reliable, sustainable plan for the future.

Good advice is not about a crystal ball or making impossible predictions, it’s about partnering with clients to help them focus on the things they can control like strategy, diversification, costs, taxes and most importantly, their own investor behaviour. These are the areas where a good adviser can make a real and enduring difference.

The future will always be uncertain but a relationship with a good adviser can give the client the comfort he or she needs to get on with life, without undue worry.

Next steps

To find out more about how any of these measures may be of assistance in your individual circumstances, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.