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Profiting from uncertainty

09 May 2019

2 minute read

The future will always be unknown. Here, we consider what investors should do to cope with the uncertainty.

Who's it for? Confident investors

What you’ll learn:

  • The problem with uncertainty
  • What is ‘retrospection bias’?
  • How to invest for an unknown future

Profiting from uncertainty

Uncertainty makes people nervous and it definitely feels as though we’re living in uncertain times at the moment. This can be quite paralysing and lead you to question if it’s the right time to make a decision, whether it’s “should you go to Europe on holiday this summer”, or “is now the right time to invest?”

‘Once in a generation’ changes are clearly afoot on the world stage and it is these changes which can make for uncomfortable headlines in the media. Because events are unfolding before our eyes, it can often feel like there is a higher degree of uncertainty than usual. However, uncertainty can’t keep on rising. So, what’s actually going on here?

‘Retrospection bias’

There is a phenomenon called ‘retrospection bias.’ This is the tendency for human beings to look back at history with misty eyes. Because we can’t feel the uncertainty of the time, the past will always seem non-threatening. With the benefit of hindsight, we always see just one, often obvious, outcome.

But consider the Cold War, when the Suez Crisis and Cuban Missile Crisis sparked international tensions; or the Watergate scandal, which led to a constitutional crisis, the commencement of an impeachment process, and the resignation of President Nixon. These are just two examples of a long list of events where we cannot compare the level of uncertainty then to what we experience today. Events will always come and go. The best we can do, as investors, is to consider what these events may mean for the investment landscape.

Get invested, stay invested

A rational investor should demand a higher return when the outlook is uncertain or unfavourable. However, for those who prefer to wait out the uncertainty before investing, they risk waiting too long and potentially missing out altogether.

When investing for the long term, the best approach is to select a range of assets (such as shares, bonds, cash etc.) that provide a sufficiently attractive return, and diversify across those holdings. The Barclays Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors.

You should only be thinking about holding these investments for at least five years as they’re designed for the long term.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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