The Illusions of Certainty and the Value of a Financial Coach

I would like to start by saying that we do not take any credit for the governments U-turn over the increased probate fees which took place within 2 weeks of our last blog! (see it pays to live).

Since then, we have had Theresa May (or Mummy to her cabinet colleagues) call a snap election, the results of the first round of Presidential Elections in France and the unpredictable first 100 days of the Trump Administration. All of these events could give rise to an increase in investor uncertainty.  On the contrary, this might imply that there is such a thing as investor certainty.  We can assure you this is not the case!

Carpenter Rees rely on an investment philosophy that doesn’t revolve around predicting the future as by definition the future is unknown. A quote that sums this up is by Niels Bohr, a truly brilliant Nobel Prize Winning Physicist, who said “Prediction is very difficult, especially if it’s about the future”

Despite the surprisingly obvious statement, most investors long for and embrace market forecasts from “experts” who peer into the future and aim to predict where the stock market is going. There is a mountain of evidence to suggest this is a fool’s game; so why do we spend so much time trying to know the unknown future and why are we so attracted to forecasts?

In reality every investment we make involves an assumption about the future and with that comes uncertainty and risk that make investors uncomfortable. It’s human nature to want to hear positive reinforcement, hence we are attracted to market forecasts.

It’s a certainty that the future will decide our investment success and failure. However, uncertainty about the multitude of possible outcomes creates the risk that we all struggle to minimise and this gives rise to the need for a behavioural coach, which is our primary role at Carpenter Rees. As we have often stressed before, it is easy to overreact to market events and make the wrong decision at the wrong time. The best sportsmen and women in the world need coaches and so do investors.

We all hate losing money and research has shown that losses are far more painful than gains are pleasurable. With that background, it is no wonder that even the most passive investor is still comforted when an investment expert makes optimistic predictions about future stock market returns.

In effect, predictions create an illusion of certainty and the desire to wish away the risk of an uncertain and unpredictable future is what make us susceptible to forecasts. We want to believe that positive forecasts are true; it’s a part of human nature!

As Financial Planners, we too have a desire to know the future but fortunately we know we can’t and we don’t rely on an investment philosophy that needs it!

Next week, I will share with you our solution to this issue by using a tool called diversification.


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