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As we all muddle our way through the various financial crises that affect us at a personal, national and international level, we often crave the one thing that is cruelly denied us. Certainty. Our love of this elusive knowledge can be evidenced in many ways. For example, we may pay more for something with a clearly stated guarantee, even though the terms of the guarantee are no more than required by consumer law. Or the price of a poorly performing stock may go up after the company comes out and tells us that our fears were justified, simply because we now know our fears were justified and we needn’t have been more fearful. The more uncertainty there is, the more we are willing to pay for the knowable, or at least the perception of it. But you also need to stop and ask yourself, can we afford the price being asked.
Fear can make us somewhat myopic. From an investment perspective, uncertain conditions makes us focus squarely on the risk of capital loss. When conditions appear more certain
(emphasis on appear) we tend to focus on the risk of missing capital gain. Both can be very expensive over the longer term. Take a cash investment in the US as an example. Citibank is offering its platinum clients (those investing more the $500,000) a 10 year term deposit rate of 0.4%pa. In a time of great uncertainty about economic recovery, effects of economic stimulus, effects of winding back the economic stimulus, you can be certain of 0.4%pa for 10 years. No-one does retirement projections based on this level of return. Why? Because it doesn’t work out very well. If things turn out OK, investing for certainty will turn out to come with a cost that few can afford.
Usually (and I must stress usually), the time for being brave is when you’re feeling frightened, and the time for being frightened is when you’re feeling brave.