Mountain or beach?: The inevitability of uncertainty in investing
Endowus Insights

Mountain or beach?: The inevitability of uncertainty in investing

Updated
18
Oct 2021
published
3
Nov 2017
.
"Uncertainty is an uncomfortable position. But certainty is an absurd one."
  • Voltaire

I wanted to take my wife on a surprise trip to the foothills of the Himalayas. The surprise was somewhat ruined when I had to tell her what to pack. Now suppose for a moment that she had no idea where we were going. What would she pack? She would probably first be very frustrated and then try to pack our entire home.

Investing is very much the same. We are going on a trip and do not know our destination. The only thing we know for sure is that we live in uncertain times all the time. Will the US stock market continue its upward rise or is it in a bubble? What will happen when Britain leaves the EU? What does Xi Jinping's consolidation of power mean for the region?

Just like you need to pack for mountain and beach, camping and glamping, you need to invest in a portfolio which has a little bit of everything.

Read more: Free lunch: Diversification in investing is a gift (Endowus Insights)

You've probably seen this boilerplate disclaimer on investments before: "Past performance is not indicative of future results." Investors have a natural psychological predisposition to want to be the "best" and are seduced by good recent performance to jump into the latest hot sector, fund, stock or asset class. This rarely works in our favour.

Say you picked one of the best-performing 25% of US equity mutual funds in the 12 months to March 2013. In the subsequent year, only 25.6% of those funds stayed in the top quartile. That result is no better than chance. In the subsequent 12-month periods, this elite bunch is winnowed down to 4.1%, 0.5% and 0.3% -- all figures that are worse than chance would predict. The WSJ recently published an article on Morningstar (one of the most widely used mutual funds rating systems) on how many investors do not realise a Morningstar five-star rating is not an indicator of future outperformance, and that only 12% of those with a five-star rating performed well enough to maintain that status for the next five years.

David Booth, co-founder of Dimensional Fund Advisors, (University of Chicago's Booth School of Business was named in his honour after his generous US$300,000,000 donation) was asked what it meant to be a long-term investor, and how long one has to wait for an investment strategy to pay off.

His answer was:

"It's at least one year longer than you're willing to give. There is no magic number. Risk is always there."

In investing, there will always be uncertainty ?and a little pain. It is in our nature to overreact to short-term noise and events.

It's difficult to continue investing in a downward trending market. We at Endowus believe that having a diversified portfolio (packing a bit of everything), and sticking to a disciplined plan that is cemented in advance, will help steer you through these uncertain times.

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