October 31, 2024
As I have written many times over the years in these monthly commentaries, the world is full of uncertainty. Most of us dislike the unknown and change because we have a desire for control. But, believing you have control over future outcomes, or a belief that engaging so called experts to stay informed will somehow help your decision making is usually an error. This can create more worry, and worrying about the future assures you of two things:
Anxiety.
Wasting Energy.
Anxiety is bad for your health; this is well established in the medical community. Hence, spending time stressed is ill advised.
Wasting energy on outcomes beyond your control is likely to result in poor outcomes. Poor outcomes manifest themselves through emotional decisions. Fear of missing out, success bias (hearing stories of how others are making money, but not their investment failures) or overweighting potential negative inputs (who might be elected and what that means for policy) when it’s only a small fraction of the important factors to consider, are all pulling on your emotions. But your emotions have nothing to do with reality.
Should we just ignore uncertainty?
Of course not!
Throwing caution to the wind and saying “don’t worry, be happy” might be good for Bobby McFerrin, but this isn’t advisable either. The answer, in my opinion is to address uncertainty head on:
Understand your risks, your goals, and what is important to you.
Incorporate inevitable uncertainty and potential for change.
By establishing a plan of action to deal with the above points (or outsourcing it to a professional) you can establish, explain, and execute a plan to navigate an uncertain future. If this is done thoughtfully and if it incorporates the range of potential outcomes, it can alleviate anxiety, reduce wasted energy, and potentially result in outcomes that are in your current and future best interest.
Spending the time preparing and planning
Using time and energy to understand where your risks exist, the goals you want to achieve, and incorporating the potential range of uncertainties, potentially allows us to develop strategies that produce more positive outcomes in a relative sense.
Fear and negative news sells. We watch and read media primarily because we want to feel in control, and it mostly perpetuates a cycle of useless noise and anxiety. Businesses, causes (worthy or not), and politicians understand this, and they exploit you to make or raise money. I strongly recommend developing habits that allow you to remove yourself from excess noise. Why? For most of us, whatever the end results of this election might be, it won’t impact the priorities that matter most, nor is it likely to be the most important factor in your portfolio’s performance.
An apolitical example of the importance of removing noise and establishing a plan:
Taking charge of your health and wellness is an area that can cause people stress. Reading books, listening to podcasts, watching media on diet and exercise, cold therapy, hot therapy, supplements, and meditation apps, can lead us down a million different rabbit holes. We pay experts a lot of money for this information. We often become overwhelmed and do nothing because we don’t know what to believe. I have gone down rabbit holes on occasion myself, but once I absorb enough information from various reputable sources, it’s not that hard to simplify to the essentials.
Ask the question: What are the actions I must take to give me a higher probability of leading a healthier lifestyle?
Essentially, all the gurus end up highlighting the same stuff. The following 4 actions are all you need. So hopefully this may save you some time and money:
Exercise
Nutrition
Sleep
Stress Management
Paying attention and executing on those 4 essentials can create the foundation of a plan which will empower you to get the best out of your body and mind. Obviously, each topic will be developed further to fit one’s unique physical and mental attributes. The point is that focusing exclusively on 4 factors can give you the health improvements you desire AND reduce overwhelming noise which can lead to inaction or the wrong action.
None of this will stop the inevitable aging of your body, but you will be able to age better.
Additionally, these 4 actions will never eliminate uncertainty. You may still become sick, injured, and develop disease despite your efforts. However, navigating this uncertainty as a healthier person, executing a potential recovery plan while healthy, is more likely to help you than hurt you. This allows focus on the actions within your control and allows letting go of what’s outside of your control.
This strategy for analytics, development of a strategy, and dealing with uncertainty is remarkably like approaching your investments. The point is to take control over what is possible, get the best out of what you have, and reduce unnecessary anxiety which can hurt you in a myriad of ways.
Tackle those 4 and give yourself a higher probability of success. You can make a similar argument achieving goals in your portfolio. Focus on what is likely to give you the highest probability of success in achieving your goals and absorb less noise and random data points.
But I am still afraid of what might happen to my portfolio!
Even if we knew all the election outcomes in advance, most of us would be unable to exploit that information and turn it into a positive financial outcome. Why? Political advertisement wants you to believe the worst possible outcome if their opponent is elected. This fear and negative campaigning are effective in winning elections, and that is why it’s so prevalent on both sides. However, the fear is (likely) less negative than the reality. Many policy topics that politicians discuss about themselves, or their opponents don’t end up having a large impact on markets. Even if what they say becomes policy or law (unlikely), there are so many other factors at play that tend to be more important factors. I don’t want to get into detail, but changes to factors such as economic cycles, interest rates, regulatory/legal change, technology change, investor sentiment, and other inputs matter a lot.
If you believe you have an edge on investing because of your ability to predict just one of these factors (such as who will become president), I urge you to reconsider. Making investment decisions on this basis are (in my opinion and experience) likely to result in making decisions that are not congruent to your best interests!
When it comes to investing, a plan that addresses your needs, goals, risks, and desires is essential. There is a myriad of opportunities which exist (and change). The trick is to marry two things:
What is the mission you are trying to accomplish with your money over time?
What are the available strategies (investment, tax, estate, philanthropy, etc.) available today to help you?
It’s important to spend time understanding:
What are we specifically trying to accomplish or solve for?
What essential elements give us a solid foundation for a strategy?
Analyzing the (perceived) range of possible outcomes.
Recognizing when emotion leads to decision-making which:
Cause mistakes in individual behaviors (not congruent to our goals).
Cause potential market mis-pricings (opportunities) in aggregate.
As you may have noticed in my writing, it is this marriage of analytics and behaviors that interests me most.
It is probably why I prefer to work closely with others, helping them to achieve their goals, instead of working as a hedge fund manager (my former career) who prefers to spend most time in the analytical realm.
You still want to know about my thoughts about the election?
Let’s keep it simple. In relative terms, I think the market views the election risks as the following: If the Republicans do well, equities do well. If the Democrats do well, equities will do poorly. If Republicans do well, inflation will go up because of tariffs, and the opposite will be true if the Democrats do well. The deficit will be worse under all scenarios because government spending is out of control.
MAYBE, MAYBE, MAYBE is my answer to the above paragraph. Nobody knows is the more likely answer. Will we see short term volatility and noise? Probably.
So, what is the plan?
It’s more of the same. Depending on one’s risk tolerance, the goal is to grow wealth over time to protect and grow purchasing power. Endeavor to achieve attractive risk adjusted returns relative to the market.
Continue to play the long-term themes, and sometimes the market gives us lower prices to play some of those themes.
Invest in countries where the rule of law helps to protect your wealth and liberty, you have certain assurances and security, and where anyone can have a chance.
Invest in countries with ideal innovation, education, entrepreneurship, and openness to change. Countries that allow criticism of one another, and their leaders. Countries that allow for the questioning of the status quo.
To deal with uncertainty, diversify across asset classes, within asset classes, and across geographies to capture potential future growth of countries, industries, and companies.
Look for assets that are potentially out of favor and may be offering long term value while reducing downside risk. Reduce assets that are more optimistically priced which may be subject to higher downside risk. This month we were given a chance to increase our weight to India as an example. This can help achieve higher risk adjusted returns over time.
Paper money led by the US Dollar will continue to erode over time. Inflation is a silent tax that you need to protect against. Companies that have strong cash flows and can raise prices, bonds with real yields that provide a reasonable income above inflation, and commodities can all help. Staying invested is essential. Time in the market is more important than timing the market.
In summary, there are so many factors that go into decision making in our portfolios. We must analyze all of it, simplify, and execute a plan for you. As your situation changes, your portfolio changes. As the information and market pricing changes, your portfolio changes. I am not trying to say the election isn’t important, but it’s not the only input that’s important.
More thoughts to come (teaser for next time if you care):
Technological advancement is changing remarkably fast. In fact, much faster than the real world can adopt. I am astounded regularly with the new tools available in my own small universe. More thoughts to come, but the opportunities available for investment (I suspect) are going to be plentiful. There will be change in the world, and I am excited and fascinated that I get to participate.
Thank you for your trust in August Wealth.
i Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and August Wealth Advisors are separate entities.
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