The Power of Not Knowing: Why Embracing Uncertainty Can Lead to Success

Uncertainty is something that many individuals try to avoid in life. But what about the advantages that ambiguity may offer? Surprises, the joy of watching sports, and the 10% average annualised return on the stock market over the last century would all be impossible without it.

The last one is easy to understand: if there was no uncertainty, investing in the stock market or putting money in a savings account would yield predictable results. All of us have experienced years like 2022, when the market saw significant declines, and years like 2023, when it saw significant increases. The conceivable gain is made possible by the potential risk. Thus, we are grateful for uncertainty.

The negative aspects of uncertainty are frequently discussed more than the positive ones. A phrase that describes how a loss might seem more agonising than a gain of the same magnitude is called “loss aversion.” Perhaps this is why people undervalue uncertainty.

Life is a series of cost-benefit analyses due to uncertainty, and risk management is our only option. On the extremes, some people may choose to avoid risk altogether, whilst others might try to completely disregard it. Then there are the rest of us. Although we have no control over the weather, we may prepare for it by packing an umbrella. We compare the convenience of being dry in the event of rain with the expense of carrying an umbrella everywhere we go. We manage risk in our investments, careers, families, and health care because we still have to make many important and little decisions in life, even in the absence of certainty.

Our lives will be better off the better we handle risk. Returning to the weather scenario, we wish to keep our umbrellas in our possession for possible emergencies only. You can control the risk you take while investing, but you cannot control market returns. So what can investors do to improve their risk management?

Avoid becoming engrossed in attempting to forecast the unforeseen.

What To Avoid

Eliminating some of the things you shouldn’t do is one strategy for risk management. Regardless of your personal beliefs about health-related behaviours, research has indicated that some things apply to the majority of people. Sugar, cigarettes, and fried meals don’t improve health. Your odds of a successful outcome rise if you stay away from these.

Additionally, there are decisions you can make to raise your odds of successful investing. Avoid becoming engrossed in attempting to forecast the unforeseen. It entails giving up on trying to time the market or select profitable stocks.

What You Can Do

Then there are risk-minimising strategies that are constructive, such taking advantage of the insights provided by scientific research. When it comes to our health, that means we should eat more veggies, exercise more, and have frequent checkups rather than smoking, eating fried food, and drinking sugar. In the case of investing, it is through diversification that we can lower our risk and yet benefit from market returns.

Research shows us that risk is more predictable in the world of investing than returns. Thus, you should make a plan and determine how much risk is appropriate for you. Every individual might be unique. No matter how much risk you are comfortable taking, you should invest and be ready for a variety of results. Your chances of success as a long-term investor increase with the degree to which you have a philosophy you can rely on and refer to during periods of uncertainty.

You Can Do It

You may be surprised to learn that you actually know more about investing than you realise. After all, every aspect of your life revolves on risk and reward. You have spent as many years managing risk and reward as you have lived. Certain years are better than others when it comes to investing and life, but the most crucial thing is to be able to stay around to see what comes next. For this reason, we believe that uncertainty can be a good thing and that people can create better strategies to handle risk. Throughout our years in finance, we have dealt with many investors and observed how people lead better lives when they are able to manage risk. Rather than attempting to forecast your future, make plans, adjust as needed, and determine the best course of action for yourself.

When faced with uncertainty, you make the best decisions you can, keep an eye on the outcomes, and adjust as needed. Accepting results does not excuse you from trying to influence them in every way that is possible or from seizing chances as they arise. You complete your assignments and develop your ability to weigh potential risks against rewards. The secret is to formulate a philosophy, define your objectives, then make adjustments as you proceed towards achieving them. It’s possible that in addition to underestimating uncertainty, you’re also underestimating the advantages of embracing it.

Source: Dimensional