Impossible to Predict World Events or Impact on Your Investments

July 6, 2016

In the original Men in Black sci-fi movie, there’s a great line by veteran Agent “K” (Tommy Lee Jones) where he tells panicky protégé’, Agent “J” (Will Smith); “There’s always an Arquillian Battle Cruiser, Corillian Death Ray or intergalactic plague that is about to wipe out all life on this miserable little planet. The only way people get on with their happy lives is if they don’t know about it”. 

The same could be said for investors and the financial markets, only that instead of death rays or plagues, we have currency devaluations, sovereign debt default crisis, dot.com speculation and, most recently, economic-block defections (notably the so-called Brexit, where the UK voted on June 23rd to exit from the European Union).  People aren’t as able to carry on with their happy lives though, because every media outlet available seems to be filling the Internet and airwaves about the potential disasters awaiting us when the British do leave the EU.

We received several calls from clients over the past two weeks on this topic, asking what the long-term implications would be for their investments if the British left and the EU were to see a further exodus of membership.  Our consistent reply was; while there is plenty of opinion across the spectrum to choose from, no one really knows the answers; the variables are just too complex.  Many times, such events have little long-term and knowable impact on a diversified portfolio and there’s no way to anticipate such events and their consequences.

As an example of how fruitless forecasting can be, it might be helpful to look back at the last 100 years and examine how dramatic events unfolded during each decade that no one could have predicted at the beginning of that decade.  As examples, by 1920, World War I had ended and the US was on the brink of a decade of prosperity and innovation.  Ten years later, by 1930, we were plunging into a world of economic despair.   Forward to 1940 after a decade of immeasurable struggle, the world was once again at war.  By 1950, The US, not Britain, was the dominant nation and we were destined for ten years of prosperity and economic growth.  Fast forward to 1970 and it all came apart as Vietnam, Watergate, inflation, civil unrest and a stagnant stock market took their toll on our collective mindset.  By 1980, few wanted to be in stocks, yet the 1980s were a boom decade for the markets.  In 2000, Y2K turned out to be nothing at all, but the amazing Internet Boom came crashing down.  By 2010, many economists and consumers were bemoaning the “Lost Decade” and how the stock and real estate market were stagnant. Yet, here we are and both have recovered somewhat from 2008.

Each of the calamities above was surprising and hardly anticipated at the beginning of their respective decades, but markets, people and nations endured, adjusted and continued to move forward.  We can’t know what events lay ahead or how they could affect our investments.  All we can do is stick to our discipline, remain prudent and trust that come-what-may, matters will resolve themselves and eventually, better times will come once again, despite the hiccups to economies and financial markets.