It all starts with a whisper, an ever-so-slight loss of confidence, or a shadow of doubt that briefly crosses the mind.
The economy looks strong, unemployment is low, consumers are generally in strong shape, and the present is positive.
But what about the future? What about inflation? What about soaring food and energy costs? What if the Federal Reserve raises their overnight lending rate too far?
And then it happens…
The R word resurfaces from its dormant state. First, one attention-seeking pundit declares that a Recession could be is certainly on the horizon. The advice is always the same – focus on the fears of tomorrow.
This first foray is followed by other highly educated people with impressive credentials pondering the possibility whether this lone voice could possibly be correct. And, undoubtedly, the answer is a resounding “yes” – for the simple reason that anything is possible in an unknown future.
The ripples of this affirmation of possibility by learned scholars spreads through the minds of traders, consumers, and business leaders who suddenly feel the need to take just a little less risk in case the learned scholars are correct.
As the high-functioning fully rational intelligent beings we have convinced ourselves that we are, we humans love to be Right. By analyzing the past and dissecting the present, we overconfidently predict the future based on our relatively meager knowledge and extremely limited experiences.
When we are right we celebrate our genius. When we are wrong we identify the single factor for which we failed to account, but otherwise note that we were, indeed, right.
Being right feels really good. If I successfully predict a recession that actually occurs and have the foresight to liquidate my entire portfolio before the financial markets tumble, my gloating has no bounds.
The Reality is we are horrible at predicting the future. While it is comforting to be delusionaly overconfident, the future is by definition unknowable. The number of variables that need to be taken into account exceed our and our machines’ capabilities.
If I errantly predict a recession that does not occur and liquidate my entire portfolio before the financial markets rise significantly, I have really put myself in a horrible position. I am earning nothing on my cash and I am absolutely frozen about reinvesting for fear I am right about the market tumbling. I have backed myself into a miserable no-win corner.
In our opinion, the solution for handling recessions, our compulsion to be right, and the reality of an unknowable future is Reason:
Step 1: Know the reason for your investments. A portfolio needs to have a purpose. Do you plan to liquidate your investments for cash flow or a short-term goal within the next three years? Or is it simply long-term assets for an as-yet undefined purpose in the future? Put this purpose in writing.
Step 2: Use reason to manage your investment risk. While we humbly acknowledge we cannot predict the future with certainty, we do know that different investments typically carry different levels of investment risk. Use reason to align your portfolio with your reasons.
While simple, implementing these steps requires thoughtful discipline in a frequently unsettling world. We have been helping our clients align their financial plans with their portfolios for 37 years, and we would be honored to help you do the same.
Quote of the week: Clifford Asness: “Predicting the future is harder than misremembering the past.”
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial. Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.