A Constant Chain of Surprises

Experienced investors know that uncertainty is a constant companion. While the human mind craves certainty, there is, unfortunately, none to be found in investment markets.

Yes, history being our guide, we believe that the stock market (companies and businesses we use daily) will reward patient investors who remain disciplined, but there are no guarantees (or facts) about the future.

Uncertainty, however, takes various forms. As former US Secretary of Defense Donald Rumsfeld once said, there are known unknowns (the things we know we do not know) and unknown unknowns (the things we don't know we don't know).

With investing, it’s the known unknowns, that investors tend to concern themselves with.

In June 2024, concerns about inflation are starting to ease, the various election uncertainties will soon pass, and the ongoing wars are slowly moving off the front pages as readers become sanitised to the ongoing tolls. How each of these topics will end is unknown, but the element of surprise has undoubtedly passed. They are known unknowns.

With many previous surprises wearing old, believing that certainty is around the corner is tempting. However, as financial author Morgan Housel states,

 “History is a constant chain of surprises.”

Unknown Unknowns

While known unknowns get all the attention, it’s the unknown unknowns that cause investors the most trouble. “Surprise is the mother of all panic”, said Nick Murray, and panic is an emotion that leads to poor financial decisions.

History is full of these surprises, here are just a few…

-              The market opened abruptly on October 19, 1987. Without warning, the Dow Jones plunged by 22%. Traders were blindsided, staring at screens flashing red (doom). The culprit? Program trading—machines executing trades at lightning speed, transforming a ripple of panic into a tidal wave.

-              In the 1990s, the internet ignited a frenzy. Stocks soared, fuelled by dreams of online gold. By March 2000, reality hit hard. The crash was a harsh reminder: innovation couldn’t replace sound financial fundamentals. The NASDAQ index plummeted nearly 80% over two years. Startups vanished, and investors faced massive losses.

-              In the early 2000s, banks handed out mortgages like candy, assuming housing prices would eternally rise. By 2007, cracks appeared. In September 2008, the collapse of Lehman Brothers sent shockwaves across the globe. Financial markets seized up, and economies plummeted. (As a side note, Kathy’s school friend Leighton is an understudy in the phenomenal The Lehman Trilogy, a play cleverly chronicling the story of a family and company that changed the world of finance. If it returns to the UK, try to grab yourself a ticket)

-              Finally, an invisible enemy brought the world to its knees. In 2020, the COVID-19 pandemic shut down economies overnight. Markets plunged, unemployment soared, and global supply chains fractured.

Prepare, Don’t Predict

In the ever-changing world of investments, the unexpected is our only certainty. As I discuss in my book, The Retirement Café Handbook, even when it comes to retirement planning—a time of life that ideally should be stable and predictable—the concept of unknown unknowns is particularly challenging. This idea, which I touch upon on page 2 of the book, highlights the complexities of preparing for retirement when we don't even know the questions we need to ask, as they fall into this category of unknown unknowns.

We can't predict the next global or financial surprise, and history shows that media forecasts often miss the mark. As investors, we should expect the unexpected and plan accordingly. Market volatility, interest rate shifts, and inflation are likely challenges. Like a ship crew practicing drills, we must prepare in advance.

Stress-testing your financial plan is crucial for ensuring it can handle downturns and maintain long-term gains. Building a cash reserve and investing wisely will protect your independence, even during surprises. Remember, safety margins are vital.

Although unexpected events might prompt a short-term focus, align your planning with the long-term market trends. Like past crises, the next storm will also pass.