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What Shall We Worry About Today?Submitted by Townsend Asset Management Corp. on August 23rd, 2018
“Hindsight bias” is that “I knew it all along” or “It was so obvious that such-and-such would happen” thought that occurs after-the-fact. We have the luxury of being Monday-morning quarterbacks and knowing, after the game is long over, exactly which play should have been called in a crucial situation. There is a sense of clarity when you look back at events.
Economic predictions and investing are similar. Wouldn’t it be nice to time-travel back, armed with the knowledge of what actually happened – not what everyone feared might happen – and invest accordingly?
While we can’t do that, we would be wise to not overreact to current economic concerns and predictions, as they rarely seem useful in actual decision-making.
A recent Morningstar article highlighted a Merrill Lynch survey of “tail risks,” things that are not likely to occur, but would have big consequences should they occur. Every month, for the past seven years, 200 institutional investment managers (really smart people) were surveyed about what they thought was the biggest current tail risk.
There were 18 different risks mentioned over the seven years, but some showed up more frequently than others. The two most common worries were the European debt crisis and the Chinese economy, with both of these being the “biggest worry” about 25% of the time. Other notable tail risk concerns were geopolitical crisis, the U.S. “fiscal cliff”, the European Union collapse, trade wars, and mistakes by global central bankers.
But Morningstar’s take-away lesson from the survey was straightforward – ultimately none of the economic fears and worries really mattered to investors. Well, yes, they did matter to active traders who were making short-term tactical decisions. However, for most long-term investors with strategic asset allocations who didn’t jump back-and-forth due to economic news headlines it really made no difference.
Granted, the game is not over and a number of today’s worries may yet come to fruition with negative economic and investment consequences. But, which one? When? For how long? With how big an impact? And, in the interim, what do you do?
With hurricane season rapidly approaching us, I found Morningstar’s conclusion interesting: If you’re informed that a windstorm lies to your left rather than to your right, what do you do with that knowledge? You can’t walk sideways forever. The time lost by sidestepping during normal conditions will be greater than the time gained by better withstanding the storm when it finally does arrive.
In investing, the money saved during turbulent times by being on the sidelines and out of the game is often dwarfed by the money earned during the more-normal times by simply continuing to play the game – despite the worries of the moment.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com