The Uncertainty Paradox
Doubt is not a pleasant condition, but certainty is an absurd one. —Voltaire
By Jeremiah Pizana, Exclusive to Corridor News
“The [financial] market hates uncertainty” has been a common enough saying in recent years, but how logical is it? There are many different aspects to uncertainty, some that can be measured and some that cannot.
Uncertainty is an unchangeable condition of existence. As individuals, we can feel more or less uncertain, but that is a distinctly human phenomenon. Rather than ebbing and flowing with investor sentiment, uncertainty is an inherent and ever-present part of investing in markets.
Any investment that has an expected return above the prevailing “risk-free rate” (think T-Bills for US investors) involves trading off certainty for a potentially increased return.
Consider this concept through the lens of stock vs. bond investments. Stocks have higher expected returns than bonds largely because there is more uncertainty about the future state of the world for equity investors than bond investors.
Bonds, for the most part, have fixed coupon payments and a maturity date at which principal is expected to be repaid. Stocks have neither. Bonds also sit higher in a company’s capital structure. In the event a firm goes bust, bondholders get paid before stockholders.
So, do investors avoid stocks in favor of bonds as a result of this increased uncertainty? Quite the contrary, many investors end up allocating capital to stocks due to their higher expected return. In the end, many investors are often willing to make the trade-off of bearing some increased uncertainty for potentially higher returns.
In the next article, I will address the concept of Managing Your Emotion and Staying Put. If any questions arise from reading this article, please feel free to reach out. My firm offers a holistic financial planning approach and investment management services for its clients.
Jeremiah Pizana is a financial planner who owns LibertyCrown Financial located in San Marcos, Texas and is an exclusive contributor to Corridor News. LibertyCrown Financial was founded with the distinct purpose of providing clients with the resources necessary to pursue a life of financial independence and prosperity. Jeremiah is an exclusive contributor to Corridor News and you can read additional columns from Jeremiah under our Business Section.
Source: Dimensional Fund Advisors LP. *David Booth, Founder and Executive Chairman, Dimensional Fund Advisors LP There is no guarantee investment strategies will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Securities and advisory services offered through Royal Alliance Associates, Inc., member FINRA/SIPC and a registered investment advisor. LibertyCrown Financial is a marketing name. Certain insurance offered through Jeremiah Pizana is independent of Royal Alliance Associates, Inc
