Rebekah Brady explains why uncertainty has a place in the world of investments.
The old saying goes: There is nothing certain but the uncertain. As we make our way to the latter stages of 2017, this sentiment has never been more poignant as Brexit-induced economic uncertainty lingers, political volatility erupts across parts of Europe and America’s global interactions keep our nerves teetering on the edge.
In the pensions and investments markets uncertainty is par for the course.
Risk and return are often heralded as the sole descriptors of markets. These are numbers, and therefore are measurable, comparable and somewhat reassuring because in the process of quantifying, one is comforted that the decision is more factually informed and based on events and actualities over a forecast.
But if there are any learnings from the markets of 2017 it is that investors are taking less and less comfort from the low risk numbers and focusing more on uncertainty rather than risk.
Uncertainty, from an investment perspective tends to be unquantifiable risk. The 2016 US election was a clean example of uncertainty in investment markets. In the run-up to the election markets dropped and risks rose every time a poll would indicate an improvement in support for Trump, a natural inference would be for markets to fall and risks to rise if Trump were elected. The actual market response was the opposite, so even if the outcome of the election was predictable, the impact on markets was not. Uncertainty refers to the difficulty in computing the chances of an event occurring and the likely outcomes and broader impacts if the event does occur.
Uncertainty is reigning as we enter the final quarter of 2017. There are major unknowns lurking on the near horizon including: the end of cheap money, as central banks move back towards more normal interest rates and wrap up their quantitative easing programs; Brexit and the infinite permutations of how the UK will interact with the world post-2019; the possible end of Abe and Abenomics in Japan; and the blatantly obvious known unknown in 1600 Pennsylvania Ave.
These are all new frontiers, we have sparse historical references to infer possible outcomes and run the risk of being significantly wide of the mark in any inferences we do make. So, what are investors to do?
Good governance is the only weapon to turn to in times of uncertainty. Take comfort from having an investment strategy in place and use it as a guide during ambiguous times. Lean on your governance and decision-making processes and advisers to help avoid reactive decision making, which can have a lasting impact on longer term investment returns.
Rebekah Brady is Head of Investments and Research at Acuvest, focusing on investment research and client management. Contact Rebekah at firstname.lastname@example.org
Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.