Risk vs. Uncertainty - How to manage both during these challenging times
Usually when it comes to investing, people talk about the relationship between risk and reward. There are always risks to consider when you invest, or do anything really. But, with enough information and the ability to understand it, there is a calculated way to measure risk and make decisions to mitigate it as much as possible, while also maximizing the potential outcome as a reward for taking the risk. That’s how to succeed as an investor and in life.
But what about uncertainty? How do you plan for it?
That’s the big question in today’s financial markets and there are no good solutions to be found. Without the benefit of hindsight, we can’t really know where we are in this markets declined or in its recovery. With uncertainty, we could have good outcomes or we could have bad outcomes. We could also have inconsequential outcomes, as well.
Until we can be more certain, the uncertainty leaves us all guessing.
What to do? Sometimes the best thing to do when you don’t know what to do is to do nothing. We’ve seen some very famous investors, like Warren Buffett and Mark Cuban, doing exactly that by converting a lot of their holdings to cash lately. Smart investors know that there’s no reason to force things when the next steps aren’t very clear. Avoiding losses and having money available to take advantage of future opportunities is a smart approach.
But, as economies around the world begin to reopen, it is becoming more possible to determine which companies and which industries are on the mend compared to those who may struggle for a while or even go out of business altogether. That opens the door to opportunities and reduces the amount of uncertainty, which allows us to better measure risk levels and design strategies to offset one risk with another. For example, if the stay-at-home economy continues for a while, companies like Verizon, PepsiCo, and McCormick should do well as people work from home and going out less. There are also larger secular trends, like the accelerated push for 5G networks, the need for more cyber security to increasingly protect us as we adopt more virtual habits, and the need to stabilize our savings with alternative forms of currency, like gold and Bitcoin, as central banks and governments around the world issue unprecedented levels of new money into their economies.
These growth trends are going to continue to grow with or without a vaccine and they can provide a valuable hedge against other risks.
Seeing through the fog Even though the stock market, the bond market, the US economy, the US dollar, and other governments and currencies around the world are all being propped up artificially right now with incredible amounts of financial stimulus, I believe it’s possible to find some very good bargains in the financial markets right now by using your eyes and ears to see and hear what’s going on around you. Building a game plan that incorporates the possibility of people staying at home and the possibility of things returning to normal, especially in a few key areas, can help reduce risk and uncertainty, while offering your investment portfolio the chance to begin growing again. And, helping restore some peace of mind to your financial future can help you thrive again, even in the midst of even the worst biological or economic crisis.
Don’t let the uncertainty of this current market environment get the best of you. Keep the long term in mind, but focus on one day at a time. And make the best of each opportunity you have. This pandemic and all the uncertainty it has brought with it hasn’t come to stay. It came to pass. And, like Robert Schuller was known to say, “Tough times never last, but tough people do.”
Hang in there, be tough, and we’ll get through this together!