I’m a huge fan of the ‘90s sitcom Seinfeld. I’ve seen every episode multiple times, and many of its phrases comprise my daily lexicon. One that comes to mind frequently is when Elaine asks Jerry, “Is it possible I’m not as attractive as I think I am?” to which he replies, “Anything’s possible.”
You could replace the word ‘attractive’ with any number of other words and it works just as well – smart, funny, prepared, calm, informed … you get the picture. And yes – in this chaotic, unpredictable world, anything IS possible. As humans, we have a tendency to construct narratives – about who we are, how things work, how and why they came to be. This is how we navigate the unpredictable nature of the world – to question the narrative, as Elaine does in that episode, is to become unmoored. It can be deeply unsettling.
The world of investing can be chaotic and unpredictable, as well, so we try to make sense of it by building narratives and making connections between discrete events, which may or may not actually be connected.
Where investors get into trouble is when they make changes to their portfolio based on their belief in the predictive capacity of these narratives. Is it possible that the Fed might decide to do X which might cause the market to do Y? Anything’s possible. The better question is, how likely is the Fed to do X, and how would that affect the portfolio in the short- and long-term? Notice the distinction here – I mentioned the effect on the portfolio, not the market. Depending on how the portfolio is constructed, it will follow the market to varying degrees. If the portfolio is anything other than a mirror image of whatever benchmark is being used to represent the market, it will not respond in exactly the same way. This is where diversification and asset allocation come into play.
Seasoned investors understand the benefits of diversification and appropriate asset allocation precisely because they recognize the limitations of our narratives’ predictive capacities. If you listen carefully to many of the voices in the financial media, in between rounds of punditry they will invariably reference the importance of diversification, asset allocation, and staying invested throughout the cycle (although this advice garners far less attention than the more sensational bits, which drive viewer engagement). It is then incumbent upon the media consumer to discern what is noise, and what isn’t. Again, what’s important is not if a particular situation will materialize, but how likely is such a situation to materialize, and how could that affect the portfolio? It may make sense to take some action if likelihood is high, but it’s almost never advisable to make huge shifts in response to speculation, particularly in a heightened emotional state.
As humans, we are riddled with biases and emotions, and are unlikely to ever act as rationally as the academics would expect us to act.
However, we can create space between the narratives and any resultant actions by revisiting the portfolio objective and reminding ourselves why we are investing. Is this a long-term goal? Is the asset allocation appropriate? Is the portfolio diversified? Is it built to weather different economic conditions? Discuss it with your advisor. It’s understandable to be concerned, particularly in our 24/7 news cycle, but try to spot the narratives and remember to stay grounded. As Jerry said, anything’s possible … but is it probable? More importantly, are you prepared?