I can tell what the investment environment is just by looking at the emails that get caught in my “junk” file. The detritus there lately tells me it’s grim.

Some firms brag about the amount of cash they’re holding. Others tout the defensive nature of their strategies. Still others push their ability to “tactically” navigate tricky markets. These come-ons are often accompanied by a proof statement that shows performance over a microscopic time period.

Their messages often start, “If you believe [choose from the following: markets could decline significantly; interest rates could go up/down; inflation/the economy may get worse; the world is about to end] you should consider [insert investment product here].”

I call them the “scary world” strategies.

They pop up like dandelions in springtime whenever the markets hiccup or world events cast doomsday shadows on the investment landscape.

There is a very high correlation between the volume of scary world strategies in my junk file and the level of client anxiety. Purveyors of scary world strategies sense investor fear like my dog smells rabbits in the underbrush. And their instincts are the same – they pounce.

Gloom also encourages the stridency of the punditry. Prognosticators are always with us – they are our profession’s back-up singers. But they, too, sense fear, and when they do, they rain their prophesies on us with increasing belligerence.

In this environment, clients and advisors alike feel pressure to do something to address the perceived calamity of the day. But just because someone has access to a microphone or an outstanding graphic design department, it doesn’t mean they know what they are talking about. This is true no matter how impressive their vocabulary or how well they carry themselves.

The heart of the problem

We do not like uncertainty. We dislike it so much we will do almost anything to make it go away. Product providers and pundits understand this and fashion their stories accordingly. They offer relief from uncertainty by suggesting they know the way forward. They allow us to suspend responsibility for our own future by handing it over to them. (See my article, The Uncertainty Monster.)

And researchers have found that our brains are constantly making predictions about the future. Predictions are the currency of our thought processes. So, we have little reluctance in giving credence to the predictions of others. (See another of my articles, Our Brains Are Prediction Machines.)

Yet making predictions about the markets is extraordinarily difficult. There are few preordained rules in investing. Markets are complex, adaptive systems that evolve and change over time. What happened in the past is relevant but won’t be repeated exactly in the future. Something that worked yesterday may not work tomorrow. (Here’s another of my articles, Don’t Believe the Rules in Investing.)

It’s not that fortunes aren’t made on Wall Street every day. It’s just that more of them are made from selling stories and the products that go with them than from brilliant trading strategies.

What to do about it

Screen out the noise and stay focused on the basics of sound investing. And just as importantly, educate and prepare clients for the journey that is investing.

Listening to and considering a wide range of opinions is a good way to stay informed and test the validity of your own convictions. But research by Philip Tetlock and others showed that predictions by so-called experts are no more reliable than those of dart-throwing chimps.

Accept the fact that uncertainty is a part of investing. In fact, that is what you are being paid to do when you invest. The better you are at living with it, the better you will be at investing.

Patience and discipline are boring, but they are the bedrock of a successful investment strategy. They beat bobbing and weaving every time. This is true no matter how scary the world gets. (See my article, In Volatile Markets, Patience Is Your Friend.)

The evidence about what works and what doesn’t over the long term is readily available. Build a low-cost, diversified portfolio and ride it through the bumps. You can quibble about the details, but history has delivered a very powerful verdict.

That verdict is that market timing doesn’t work. Yet market timing can be, and often is, dressed up to look like something else. Don’t fall for the disguise. No matter how much lipstick they put on it, if a strategy depends on someone’s (or a computer’s) ability to guess when to get into or out of the market, avoid it. (See my article, Market Timing Is the Enemy of Investment Success.)

Resist the gravitational pull of a pitch based solely on past performance, especially if it is over a short period. A hot track record may look like a life raft in a stormy sea, but there are too many examples of people who got it right once or twice and then failed to do it again on subsequent tries. (See my article, Why Investing Based on Past Performance is a Terrible Idea.)

Active management comes in many forms. Some can be useful in building portfolios. But the odds are stacked against active managers. Every year, the SPIVA Scorecard demonstrates this. Have a rock-solid thesis rather than a hair-on-fire impulse when you select an active manager over a cheap passive alternative. (See my article, Why is Active Management So Difficult.)

Teach your clients how to behave as good investors. This is different than teaching them how to be good investors. If clients know what to expect and are trained in what to do when they encounter turbulence, they are far more likely to be able to ride through it without freaking out. (See my article, Ten Facts Clients Need to Know to Achieve Investment Success.)

The training process should begin as soon as a prospect becomes a client and continue for as long as they remain one. You can’t start the process when the turbulence has already begun and panic has set in, any more than you can give someone a parachute after they jump out of an airplane and expect a good result.

The punditry and the scary-worlders know that humans dread uncertainty. They count on it. They prey on it. They know how we thirst for silver-bullet saviors.
Teach your clients to tune them out and help them understand that there is no way to avoid the unpredictability and volatility of the financial markets. Help them see that, in fact, they are being paid to take risk. (See my article, Ignore the Gurus and Educate Your Clients.)

Whatever challenges are reflected in the markets, one thing never changes. We overcome them and the world moves forward. Markets recover and continue to rise. This is not magic. There are good reasons for this that we should expect to see repeated. (See my article, What, Me Worry?)

You’ve watched would-be saviors turned into fools over and over. That knowledge and experience has great value. Pass it on to your clients and guide them around the swamps and pitfalls that await the unwary.

That is the greatest service you can provide.