Making Safe Investments in Dangerous Times

Oct 25, 2022 | Finance

Investors looking for opportunities today are staring into a crystal ball of uncertainty. 

Fear and anxiety are casting dark shadows over the markets. All we hear about are looming dangers and disasters to come.  

Why the high anxiety? It’s difficult to think calmly and rationally in the aftermath of a global COVID-19 pandemic, with dangers of global climate change and geopolitical conflict escalating every day. In the financial world, the elephant in the room remains the seemingly non-stop news reports warning of rising inflation and the skyrocketing costs of food, housing, and living, as well as the growing calls for interest rate hikes by the central banks of many nations as they attempt to stave off persistent and entrenched inflation.  

Financial fears are widespread. Belief that markets will head higher is well below average, on par with the Great Recession of 2008. Investments everywhere are suffering, as stock and bond markets are both down, weakening even the most robust and diverse of portfolios.

There’s Fear and Loathing in Las Markets. 

This raises an important question for every investor: are we truly living in an unprecedented economic emergency, or … have we actually been here before? Can we move beyond the power of our kneejerk emotional reactions to news headlines, to make solid and sound investments for our future in the midst of the growing risk and uncertainty surrounding us? 

Gazing through the looking glass, a different, more stable financial reality comes into focus if we move away from our current fears to focus on future probabilities. The key is to understand how we, as investors, react to short-term uncertainty and anxiety in our everyday lives, and how these subjective psychological reactions do not accurately reflect longer-term trends in market behavior that are revealed by an objective look at history – and our future.

In the midst of our present-day economic crisis and collective anxiety, there awaits opportunity for investors that embrace today’s risk and uncertainty as natural components of human investment behavior and historical market cycles. We have been down this historical path before, and we have to trust that history in the long-term will outweigh our emotions in the short-term. 

Good things come to those who wait

As human beings, we’re hard-wired to focus on our present moment and to avoid fear, uncertainty, and risk. Fearing dangers and scarcities helps us survive by planning for potential difficulties in the future. The big problem, when it comes to investing, is that the near-future of the market is unknowable, so trying to ‘time the market’ feels more like a fool’s errand than a rational plan for achieving financial security. When we’re afraid, we’re not going to act – or invest – rationally. If we’re banking on knowing how the market will act tomorrow or next week, we’re always going to be afraid, because this is always uncertain territory.

Since money is attached to our sense of self and our feelings of security, the pain we feel when we think about losing money or things we have, hits us extra hard. Psychologists call this phenomenon ‘loss aversion’, where even thinking about the loss of an asset creates more immediate insecurity and anxiety than thinking about much larger, and more probable, potential gains. When we feel insecure, anxious, or scared, we then risk succumbing to a psychology of ‘fight or flight’ behavior that leads to dangerous short-term investment decisions based on emotions such as fear.  

How can we tell ourselves, in this moment of social and economic uncertainty, to avoid this type of emotional reaction to media headlines, reduce our anxieties, and deliver a cool, stable, rational plan for investing?

The good news is, if we look across the history of the market, we have been in this situation many times before. Over the long-term, markets rise again after crises like these, and sound investments made in tumultuous moments using rational planning tools pay off in spades. 

Whether it’s a forest, children, or your portfolio, the key is to remember that significant and solid growth comes only over the course of years, not days or months. If you are checking your portfolio every day, or even every week, you are focusing on transitory short-term noise and loss that actually pales in comparison to your portfolio’s long-term growth and potential future gains. Financial markets are volatile by their very nature. Bear markets (generally defined as a drop of 20% or more from a previous market high), have always spurred anxieties and fears such as those we are currently living through. Hindsight’s 20/20 vision now makes bear markets of the past look like missed opportunities, today’s crisis appears as if it were inevitable, and the future looks like nothing but risk. 

The big difference is, today you can see and feel what you have, and imagine the risk of losing it, while the gains you’ll accrue in coming decades if you ‘stay the course’ are much harder to know and visualize, despite the fact that over the long-term, history shows us they are just as real. The key, therefore, is overcoming the desire to ‘fight or flee’ from our fears, by learning our own, personal, financial risk tolerance: “the maximum degree of uncertainty someone is willing to accept when making a financial decision that entails the possibility of a loss.” 

When the economic seas are rough, investors can yield substantial returns for their portfolio by overcoming their own psychologies of loss aversion and ‘fight or flight’, instead seeing the risks prevalent today as opportunities for future gain – provided, of course, today’s investments are made rationally, within a comfortable range of exposure and tolerance to risk. 

Sometime, in the future, looking back in hindsight, the rational risks investors take today will slowly but steadily transform into stable growth, yielding returns over the long-haul. As the expression goes: days move slowly but years move quickly. Today’s markets may indeed become much worse, but we have the evidence, and so we must have the confidence, that they will rise again. Good things come to those who wait.

What about the doomsayers?

There are always investors that shrug off historical evidence and market trends to claim they have special insights into volatile markets. “This time in history is different!” they might say, or “Inflation, geopolitics, COVID-19, and climate change, well, this time they will derail markets for good!”

Doomsayers may lament that the end is near, and as noted above, we’re hard-wired to listen closely and to react anxiously to this news. Our fears help some of us gravitate to more unconventional, ‘sexier’, but far riskier investment opportunities such as crypto-currency, rare artworks, or trying to time the bottom. These all remain unproven strategies over the test of time, and we tend to hear about the few stories of success rather than the countless stories of failure and bankruptcy that don’t reach our ears when markets recover.

Although doomsayers hinge on the fact that we cannot predict our short-term future, we do know what is probable in our long-term future. If we invest today by removing fear and emotion from our decisions, aiming at long-term growth, history tells us we’ll succeed. The psychological fear and anxiety shrouding today’s financial markets is simply a normal human reaction to uncertainty; it’s the price of admission to access the market’s long road to portfolio growth and higher returns in years to come.

It’s always darkest before the dawn

Things always get worse before they get better, right? We can’t change the past and we can never know the future. 

Remembering this maxim will reward those of us making coolheaded investment decisions in today’s market dip. Markets may get worse, or they may start improving tomorrow. Our only recourse to this uncertainty is to use history to know that, in the long-term, portfolio growth is in our future if we invest wisely and consistently today. These may seem like dark days, but it’s always darkest before dawn. We know the dawn is coming. 

In sum: don’t invest emotionally, invest rationally. Learn how much risk you can tolerate today, and then invest by focusing on the long-game, not the daily headlines. Stay stable. Stay the course. Stay disciplined. Don’t panic. We have been down this long and winding road of economic crisis and recession many times before, and we have always found our way back home. This most recent trip down the market’s rabbit-hole will be no different. 
We know our fears in the present moment are real, but not rational. We know that markets will eventually recover. We know that history is on our side. So, invest calmly, carefully, and consistently, and your future self will thank you.