Uncertainty Is the Only Certainty


John Micklitsch, CFA CAIA, President & Chief Investment Officer

Uncertainty is a persistent part of our daily lives. It takes many shapes and forms but, in general, it is just not knowing precisely how things will play out. As Yogi Berra famously said, which we’ve paraphrased; It’s tough to make predictions, especially about the future. Unfortunately, Yogi was right. The good news for investors is that you don’t typically have to make grand predictions about the future, you just need the combination of time and productive assets in your portfolio, and things tend to work themselves out.

Today, geopolitics, inflation and interest rate policy are all creating uncertainty for investors. A few years from now, it will be a different set of issues but, rest assured, investors will still be grappling with unknowns while markets will still be resolving them when given enough time. Until then, periodic uncertainty will always be the entry fee when pursuing higher potential returns.

In the case of the current conflict in Ukraine, the suffering of a duly sovereign, invaded nation is gut wrenching. It shouldn’t be this way. The table at the end of this article shows, however, that trying to avoid uncertainties around war and conflict has largely been an unnecessary exercise.

As a result, long-term investors would likely derive more value from developing a deeper understanding of the relationship between uncertainty and future returns than from trying to avoid uncertainty in the first place. The second exhibit at the end of this piece illustrates how the future returns effect has played out following periods of market turmoil over the last several decades. As you can see, market selloffs are frequently followed by periods of sharp recovery. To paraphrase my colleagues at Ancora, rarely is there future value in the absence of some near-term uncertainty. Or, as Warren Buffet says, he was a buyer not because the headlines were good, he was a buyer because the prices were good.

If uncertainty is largely unavoidable when seeking higher returns, does not derail long-term innovation and is frequently followed by a period of strong recovery, how then can investors take even more steps to further mitigate uncertainty risk within their portfolios?

We believe the process starts by thinking of your financial assets as two buckets. The smaller bucket’s primary job is securing enough personal liquidity outside of the market that you can withstand the time it takes for markets to recover from periods of uncertainty without having to sell or do anything. If you are working and don’t rely entirely on your investments to fund your lifestyle, that liquidity reserve can be small to minimize long-term drag. However, if you rely on your investments for your primary income, you might want to consider having a bit more in your little bucket. With your personal liquidity needs reserved, it becomes a lot easier to shift your focus to a long-term horizon with your remaining investment assets which we’ll consider the bigger bucket. The primary role of the big bucket is to replenish the little bucket at opportune times, or as needed, using returns earned from being a patient and disciplined long-term investor.

Second, we encourage investors to build the core of their big bucket investments around enduring, high-quality holdings and strategies. We know from Warren Buffet that if the market was closed for ten years or you had a limited number of lifetime investment choices and you still would choose to own a stock, a particular fund or a strategy under those parameters, then that’s probably a good measure of quality.

Lastly, we always encourage investors to avoid trying to time markets. As my colleagues at Ancora like to say, more money has been lost trying to avoid bear markets than from the bear markets themselves. Time remains one of the most underappreciated risk management tools available to investors in this or any market, provided your personal liquidity needs are reserved and your portfolio is built around quality holdings.

In closing, we have three major issues causing uncertainty in today’s markets. Inflation, interest rate policy and geopolitics. Stocks have pulled back as a result, but what are the odds we emerge from this bout of uncertainty stronger in ways that we cannot currently understand or anticipate? Personally, I would bet that we do. The western NATO alliance has been re-fortified, supply chains are being re-engineered and rebuilt for the future as we speak, China must be thinking twice about any actions in Taiwan given the world’s response to Russia and the pandemic has largely slipped to the back pages of the news. Our best and simplest advice for periods like this remains to reserve some assets for the unknown and then play the higher-probability odds that the world will resolve its conflicts, continue to innovate, create economic pathways for growth and lift living standards around the world. The value of which accrues to those who choose to remain optimistic and stay the course over time.

BlackRock data table

Sources: BlackRock; Morningstar as of 2/28/22. *Returns shown for events prior to 1979 are represented by the S&P 500 PR Index , which shows principal returns only (excluding dividends), from 1/1/26 to 12/31/78. Returns for these periods would likely be higher if dividends were included. Returns for events in 1979 or later are represented by the S&P 500 TR Index, which show s total return (including dividends), from 1/1/79 to 2/28/22. Index performance is for illustrative purposes only. It is not possible to invest directly in an index. Past performance does not guarantee or indicate future results.

BlackRock data table and bar chart

Source: BlackRock; Morningstar as of 1/31/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 1/31/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance is for illustrative purposes only. I t i s not possible to invest directly in an index. Past performance does not guarantee or indicate future results. *Indicates principal return, dividends not included. Returns are principal only not including dividends. U.S. stocks represented by the S&P 500 PR Index .

Author’s Note: Please note that here we discuss only the potential economic and market impact of the conflict in Ukraine, acknowledging that the physical and emotional toll is likely far greater and that the situation is still developing. Our thoughts are with those whose lives are affected by these events.

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