Embracing uncertainty in the market BY TEE LIN SAY

by **Cals** Mon 22 Feb 2016, 03:21

Saturday, 20 February 2016

Embracing uncertainty in the market

BY TEE LIN SAY
All in the game: Stock traders work at the New York Stock Exchange. Investors need to understand that there is never certainty and clarity in the stock market. – AP

IT is certainly a dilemma for any investor in the market now. With the United States having had a superb seven-year bull run, many of them are wondering whether to run with their gains, or stay a little longer to eke out any remaining profits from this maturing bull market.
It is easier to stay negative considering the volatility in markets. The news coming out isn’t helping. Global growth concerns, persistently low oil prices and worries on China’s currency outlook. Uncertainty troubles people more than they know.
Recently, New York Times reporter Carl Richards wrote an article aptly titled “Accepting the Uncertainty of Our Financial Life”.
In the article, he wrote about his friend, who is an emergency room physician in Salt Lake City.

The physician described an interaction he had with a distressed, uncomfortable patient. After doing all the tests he could and finding nothing wrong, all he could do was give the patient that age-old, wonderful doctor advice: “Go home, rest up, drink fluids and call me in the morning.
“The funny thing about this patient, was that after I told him nothing was wrong and he should just go home, he actually seemed disappointed,” said the physician.
This happens all the time, according to the physician. It often seems like the patient would rather have a bad diagnosis than face an uncertainty that could well be labelled “good”.
“It’s fascinating. We yearn so badly for clarity that we often prefer a negative outcome we’re certain about to one that leaves us in suspense,” said Richards.
So it comes as no surprise that this intolerance for uncertainty also manifests into our financial lives.
“One way this fear manifests itself in our investments is when we make hasty or rash decisions based upon cataclysmic market forecasts, like the one this year from RBS suggesting that people sell everything in their portfolios except high quality bonds,” said Richards.
Last month, RBS economists urged investors to sell everything except high-quality bonds, warning of a “fairly cataclysmic year ahead.”
Richards added that in spite of the abundance of evidence that proves that market forecasts are often wrong and lead individuals to make decisions that hurt them over the long run, we still embrace and act on them.
“We do something that we know is a bad idea just to eliminate that feeling of uncertainty. Selling when your portfolio is down 20% – we know that’s a bad idea. But we prefer the negative outcome of locking in those losses because it’s certain,” he said.
Now if we were to understand this instinct and recognise it when it happens, it can help us when markets get rough, or when our stocks make temporary paper losses.
Investors need to understand that there is never certainty and clarity in the stock market. Investing is a probabilities game.
Historically, stocks go up two-thirds of the time, so typically it has always been more profitable to remain invested in the stock market.
However, for the vast majority of investors, the pain of losing money is a more powerful emotion compared with making money. This has caused many investors to follow their gut and sell just before a rebound because they cannot bear the powerful emotion of losing money.
That emotion is stronger than the pleasure of making money in the future
“The only way to do well, over time, is to embrace the uncertainty and remember that in the long run, markets reward risk-taking,” said FisherMarketMinder.
It added that there is no way anyone could know when the current correction would end.
“Sentiment-driven swings are just impossible to predict and time, at the top or bottom. But we do believe most of the downside is behind us, and in our view, this isn’t a time to sell. This is a time to hang on, think long-term, remember your goals and time horizon, and keep your eye on the prize,” it said.