Fix it Friday Ep. 4 - Seeking Certainty: The Investor’s Paradox

• The financial industry's reliance on predictions to sell advice and products perpetuates the illusion of certainty, which cannot be achieved. Forecasts about market timing or economic performance with studies showing their accuracy are no better than chance. Investors often fall into the "uncertainty trap" by prioritizing predictions over sound financial preparation.
• Relying on financial forecasts, especially those from seemingly credible and articulate forecasters, is often counterproductive, as their accuracy is comparable to a coin flip. Instead of seeking predictions, investors should focus on preparation and resilience to navigate unprecedented events and uncertainty effectively.
• The idea that uncertainty can be heightened at specific times is misleading because uncertainty is constantly inherent in every moment. Media narratives suggesting otherwise can create unnecessary caution and anxiety for investors. Recognizing that ever-present uncertainty helps foster a more grounded and resilient investment approach.

Voiceover: [00:00:00] The following podcast by Fusion Family Wealth, LLC. Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of, or as a substitute for, personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.
A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www. fusionfamilywealth. com. 
Jonathan Blau: Welcome to Fix It Friday. Today we're going to talk about what I call the uncertainty trap and the investor's reliance and, and desire for financial predictions [00:00:30] and, and how that's one of the most harmful harmful kind of endeavors that an investor can embark on is the, the pursuit of what I call the illusion of certainty.
So, well, let me start off by saying the financial [00:00:45] industry, is the seller of a product. I call it advice. It used to be financial products like mutual funds and, and insurance products and such, but it has evolved into primarily advice driven sales. [00:01:00] In the pursuit of what the client or the consumer who's the investor is looking for, which is as much certainty about their financial future as they can possibly buy.
What the, what the general industry that, that we're in [00:01:15] has, has come up with as a solution. is to hand back the illusion of certainty to the investor. And what I mean by that is they'll tell the investor how many analysts that they have whether it's Merrill Lynch, UBS, Goldman Sachs, you name it, how many [00:01:30] economists that they have and the analysts in each industry are going to tell the investor when certain industries are going to outperform others and position the portfolio of the investor to take advantage of those, those opportunities.
Quote unquote forecasts, and at the same time they'll talk about how the [00:01:45] economists are going to consistently forecast what's going to happen in the economy, when the next recession will come and end, and they'll use that information, the, the investment advisory firm to tell the investor how to gain a timing advantage over the stock [00:02:00] market.
And of course, one of the things I've learned in, in the 35 years of practicing in this business is. The economy can't be consistently forecast, nor can the markets be consistently timed. But the firms [00:02:15] consistently sell the, the, what the consumer is looking for, but which doesn't exist, which is the illusion of certainty.
So, so I shouldn't say that. The illusion of certainty is prevalent. What doesn't exist is certainty. In fact, what I always [00:02:30] tell people who are seeking it. in respect, with respect to their financial investment endeavors, is that not only can't we get it there, but certainty doesn't exist anywhere as a condition in nature.
So what is one to do in the [00:02:45] face of uncertainty and, and our desire to, to have it when it doesn't exist? So what, one of the things that. We teach people to do is to be very aware that financial forecasts on CNBC or anywhere else [00:03:00] are, are things that you should pay absolutely no attention to with respect to trying to better your, your financial planning outcomes.
And one example is fellow named Phil Tetlock wrote a book where he did a study on the [00:03:15] accuracy of, of, of predictions. And what he found is. Forecasters write about 49 percent of the time. So it's the same efficacy of a coin flip. But what was worse is the, the, the forecasters who were the most articulate and, [00:03:30] and the most credible were the ones that often had the worst forecasts and, and unfortunately those are the ones that the the person who's seeking out certainty will listen to In, in, in, in terms of.
[00:03:45] Implementing what their forecast is predicting the most that listen to the ones who sound the best, who are the most overconfident in their ability to predict the future. So, one of the things that I always advise to, to help avoid [00:04:00] falling into that trap is to spend much more of our time not forecasting or predicting, but being prepared.
So what I mean by that is things that never happened before. we call unprecedented. Those are the [00:04:15] things that a lot of people are always afraid of. What if this or that happens? And and, and what, what if Russia goes into Ukraine with, with tactical nuclear weapons? We've never seen that before.
But what we need to do is we need to spend much more time being prepared. [00:04:30] Meaning Things that never happen will happen and they'll cause our investments to go down temporarily. And so as long as we have two to three years living expenses set aside outside of stocks, then we'll be, we're prepared for that eventual decline to spend money [00:04:45] without having to sell the stocks while they're temporarily down because we'll have those two to three years of spending set aside.
And I say two to three years because typically while the stock market goes down on average During what's called a bear market, a 20 percent [00:05:00] decline from a previous peak, that happens once in five or six years. The recovery from the bottom of that bear market to a new high since the 1920s has taken 40 months.
So you're prepared from a financial standpoint for a bear market, whatever the [00:05:15] event that caused it is if you have two to three years living expenses that generally would prepare you so that you don't have to worry about locking in a permanent loss by selling into it temporary. Decline, which incidentally is the only kind of declines we've ever had.
So the other [00:05:30] lesson that we want to learn about certainty from my perspective is when we're watching the media and they come up with one of my least favorite narratives, which is they talk about heightened uncertainty. The market hates uncertainty, they tell you, and investors hate uncertainty. [00:05:45] So with this new war in Ukraine and with the new political regime coming in, the markets just hate uncertainty and they'll tell you that you have to be cautious because of that.
And what they imply by telling us that is that there, there can be [00:06:00] uncertainty about the future can be higher at one point in time than another. And when you think about it, that's kind of a crazy thought, right? Because every minute. There's uncertainty. Things can happen at any time that we don't know are going to happen.
[00:06:15] So by definition, I always found that to be a very intriguing thought in terms of how crazy it is that there's levels of uncertainty that can kind of be measured. So. What's interesting is there are studies that look [00:06:30] back in modern history at things like policy change and how often newspapers and people are talking about uncertainty.
And what they tend to show is that uncertainty bottomed as uncertainty over the future peaked in two different [00:06:45] periods, right before 9 11 and right before the credit crisis in 2000 the end of 2007. And, and when you think about that. It's, it's, it's so far from true. In [00:07:00] reality, the threat of a terrorist attack didn't increase on September 11th.
It's just, it was probably never more certain that we were going to have a terrorist attack on our soil on September, than on September 10th. It's just that we were ignorant to the fact on September 10th. [00:07:15] It's not that the risk of a terrorist attack became less. more likely after September 11th occurred.
And the same thing with the credit crisis. We were staring down the face of huge societal risks right into September 10th and, and into the, [00:07:30] the bankruptcy of Lehman Brothers and Bear Stearns, et cetera. But we just were ignorant to the, to those facts. So, so certainty wasn't, wasn't somehow greatest on September 10th and then uncertainty increased on September [00:07:45] 11th.
It's actually the opposite. We probably, again, never could have been more certain that there'd be a terrorist attack. There was never more certainty of one than on September 10th. So so when we think about it in those terms, it's important not to get fooled by [00:08:00] the idea of heightened uncertainty. So when we're endeavoring to roll our money we need to understand that uncertainty is a condition that always exists and we're pre programmed with certain biases.
One of them is an [00:08:15] ambiguity bias. We would prefer to engage in an investment option where the potential outcome is more certain than an ambiguous option. Meaning investing in stocks that frees our principal for the [00:08:30] entire term of the investment until the bond matures. Investing in stocks, rather, where we don't know where the returns are going to be.
Are they going to be positive this year or negative, and to what magnitude? We'd rather invest in bonds, even though we know that the long term outcome [00:08:45] is going to be less favorable. Because it's more important to us from a behavioral standpoint to, to invest in, in the bond market. because it has more certainty attached to when we're going to receive income and when we're going [00:09:00] to receive our principal back at maturity.
So at the end of the day, our ambiguity bias causes us to make poor decisions because we're seeking out things that are more certain. So, in summarizing what an investor needs to do to succeed with constant [00:09:15] uncertainty is a few things. One is ignore predictions, understand that financial predictions don't work.
All of Wall Street's annals last year had an average forecast that the stock market, the S& P 500, would end this year at 4, 800. [00:09:30] We're now at 6, 100, so they were only wrong by about 25%. And the year before, it was even worse. The head of Morgan Stanley's in, in stock investment research was a guy named Mike Wilson.
I say was because he was demoted. He [00:09:45] said the market would go down to 3, 000 in 20, in 2023. It ended at about 4, 800. And the same was for true for David Koston, the head analyst at Goldman Sachs. At the same time. Be prepared. Don't worry about predictions. Worry about [00:10:00] preparedness. Have enough money set aside for the next decline so you don't have to worry about what causes it.
You know that you're prepared for what, whatever causes it in terms of switching to be able to spend the money that you have aside, two to three years living expenses. And also be prepared emotionally. [00:10:15] Understand that things that never happened before happen all the time. And engage more with history so that you can, when you're engaged with history, you'll appreciate what Harry Truman said, which is that the only things [00:10:30] that are new in the world are the history that we don't know.
And finally what I would say is what Yogi Berra said. It's tough to make predictions, he said, especially. about the future. With that thank you for joining us on this week's Fix It Friday. You can [00:10:45] access the Crazy Wealthy Podcast anytime on your favorite venues where you access all your podcasts.
We're on Apple, we're on Spotify, and and all the other favorites that That you that you might access your others on at the same time, you can go to crazy, wealthy [00:11:00] podcast. com, and you can also access it on our website, fusion family, wealth. com. Again, thanks for listening. And we'll see you in a couple of weeks.
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