Climbing the Wall of Worry and Finding Goldilocks – Again
Lately, financial commentators have been increasingly remarking how stocks are “climbing a wall of worry.” For those listening, it's easy to get a sense of déjà vu. The phrase “climbing the wall of worry” has been used for decades whenever stock market rallies seem at odds with deteriorating economic and/or social conditions. Further, as we approach the next Federal Reserve meeting, expect references to a “goldilocks” market (not too hot, not too cold), in which the economy improves marginally but not enough to prompt the Fed to ease back its massive monetary stimulus.
Without a fully developed investment plan, many individuals will read or hear these phrases and either develop a false sense of security (my stock portfolio will be just fine – I’ve seen this before) or be convinced they have to make changes immediately (my portfolio is underperforming, I need to act now). Being confident in your current portfolio, or deciding to make changes, should never be based on short-term performance, let alone eye-catching taglines. But why are we often influenced by these phrases we see over and over?
“...when trying to influence someone to buy a product, vote for someone, or make almost any decision, it is advantageous to (at least appear to) show as much clarity as possible.”
There's a reason why we may make decisions based on simple and familiar descriptions. According to behavioral science, ambiguity bias is the tendency for humans to avoid an option that they feel is missing information. I stress "feel" because even if all the relevant information is present (or can at least be deciphered), it may be too hard to understand. In that case, an individual would defer to the alternative option he/she can more easily grasp, or choose nothing at all. This behavior also relates to another bias, known as the familiarity heuristic or the "mere exposure effect." This bias highlights how we are more likely to choose options where the outcomes are familiar; to put another way, we avoid trying new things because the experience or end result is unknown. Phrases like "goldilocks rally" or "climbing the wall of worry" are particularly influential because they provide simple explanations of challenging market environments. That they continue to be used time and time again further reinforces investors comfort with the terms.
As well-intentioned as it may seem, using broad-stroke statements like “climbing the wall of worry” and “goldilocks rally” should be taken with a grain of salt. The market is often driven by far more complex and dynamic factors. Simplifying short-term market performance can be used to portray a false sense of security and/or convince you to “act now” with regards to making investment decisions. Sometimes, you need to think outside the box and question if conventional explanations are still appropriate given your current, and distinct, situation.
When a fully developed investment plan is in place that considers a client's unique situation and objectives, the best recommendation is usually to stay the course as headlines like "climbing the wall of worry" loom large. I also fully admit that “stay the course” is another oversimplified and overused term. However, when investors have a thoroughly researched and vetted strategy like our All-Weather portfolio—one that is designed to persevere through all types of market situations—staying the course is not an oversimplification. It’s a well thought out and purposeful recommendation. One that's not swayed by the catchy taglines.
As always, if you have any questions, or would like to learn more about how SineCera Capital has helped clients during these complex times, please do not hesitate to contact us.
Best Regards,
Adam J. Packer, CFA®
Chief Analyst | SineCera Capital
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