Occasional ramblings and the odd insight from years of experience in wealth management and dealing with people.


Difficult Conversations – Risk and Uncertainty.


Decisions around money – and many other things in life – are loaded with emotion. Sometimes the short-term noise – and there’s
plenty of that with scary headlines and daily predictions of doom – can distract us from our long-term plan and ambitions.


Now, as you might expect I have a long-term plan in place for the future. It may (in fact, will) not pan out precisely as predicted and I know I have to revisit and update it regularly. I also know thatthe short-term gyrations of the value in my pension funds are largelyirrelevant for the next number of years.


God willing, and if the statistics are valid, at least some of my pension money will be there for me for over 30 more years. There may even be a few bob left for the kids when I go to the great Financial Planning house in the sky*.


As discussed here before, a certain area of the brain associated with pleasure lights up and can be picked up on scans. For the last couple of years, my brain probably looked like this when I checked the value of my pension funds – on an infrequent basis.


This is because the value kept increasing despite the predictions of doom around Trump election, talks of Trade Wars and the Brexit vote.


Here’s a little tangent for you on Brexit – circle Britain on the map below; if you can find it. Then compare it to the rest of the globe.




So, if you have a globally diversified portfolio for your long-term money, maybe you shouldn’t be too worried about the Brexit impact on that portfolio in the short-term.


In any case, while pleased, I knew the value of my funds would drop sometime and there are predictable ranges for such drops. So, as long as I stayed focussed on the long-term plan, and have the right strategy in place, it wouldn’t matter. Confidently, I vowed to completely ignore the inevitable paper-losses when they arrived.


Well, the inevitable paper losses duly did arrive in 2018. As usual, the drops were accompanied by a set of reactive headlines in the media and an escalation in the time given to well-educated and bright people who claim an ability to predict the future.


S&P 500 (U.S. Market): 5-Year Performance.



Confession: I have to confess that I looked at the values more frequently than before and, at times, had to persuade myself that I was doing the right thing.


The only upside in this recent activity was that I was thinking like one of my heroes……



It appears that I wasn’t the only one; here’s an extract from a story on Bloomberg on mega Swiss Bank UBS and its recent results.


‘UBS sees outflows of $13 billion after rise in market volatility.’ 


The bank’s wealth management and asset management divisions saw asset
outflows of some $13 billion in Q4 2018 after their wealthy clients took fright
against volatile equity markets and rising trade tensions.


This is all very predictable and understandable if you are a student of human behaviour. But it can be terribly damaging to your longer-term financial well-being. As you will see from the graph below, the people who took fright (understandable) and then followed it with action and moved to cash (understandable but flawed thinking) have missed the recovery in January.


S&P 500: 3 Month Performance.




Risk versus Uncertainty


In my case, and despite more years than I care to remember in this business, my emotional response was to make the classic mistake of confusing risk with uncertainty.


I know that no one can predict what will happen – that’s uncertainty. But I also know that this uncertainty is bounded within predictable ranges and that over time it will level out. So, while uncertain in the short-term, it’s not risky for me in the long-term.


In fact, a bigger risk is that uncertainty trumps the real risk, and we end up making costly mistakes based solely on a rational and hard-wired fear of the unknown.


Thoughts and statements such as “I can’t predict what will happen” and “it’s all very uncertain right now become the green light for making short-sighted decisions.


Instead of working towards on our future goals, we may focus on trying to control what’s clearly outside of our control – the inevitable drops in value in our portfolios from time to time.


You see it’s always uncertain but we don’t mind when it’s positive uncertainty. However, we have firm evidence to believe investors will be rewarded for that extra uncertainty. Unfortunately, we can’t say with certainty how much the reward will be – we simply don’t know.


Because we can’t offer you a guaranteed number, uncertainty masquerading as risk mentally cancels out the reward of being invested – even for my pension if I’m not careful.


Of course, I stuck with the plan, but have to acknowledge that it was difficult despite the evidence-based logic that gives me confidence that I am doing the right thing. Thinking like Homer Simpson and then doing the opposite has served me well over the years.


Moral of the Story


If you have a dynamic Financial Plan with a clear vision of your future and are confident that you have selected the right actions to achieve this, follow step 1 in Keith Matthew’s recent blog Five Financial Best Practice for 2019.


If you don’t have a clear Financial Plan in place, you know who to contact…….clarity is but a click www.metisireland.ie or an email
away icooke@metisireland.ie


* Footnote: If Jenny and Rachel happen to read this, I may have prioritised Experiences over Stuff so don’t count on it!


Ian Cooke
Private Client Manager



Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.

All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified independent financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.