Embracing Uncertainty
Quarterly Commentary | Q3, 2024
Author: Jason Kirchhoff
The North American ash population is estimated at 8 billion trees, about 7 percent of all trees in Eastern U.S. forests. That figure is closer to 20 percent in large cities, where ash trees were planted along city blocks, parks, and green spaces. Ash trees were chosen by horticulturalists because the species was very hardy, tolerant of pests, fast growing, and had a pleasing shape and canopy. It was considered a desirable choice for a long-term, healthy urban landscape.
There was no way for the experts to foresee that a pallet delivery from Asia to Michigan in the 1990s would introduce a destructive insect to the US ecosystem. The devastating impact of the Emerald Ash Borer has left cities, parks, golf courses, and green spaces all over the county barren and scrambling to replant with new trees. However, maybe if the experts had a little doubt about the future (especially considering what had happened to chestnut, hemlock, and elm trees over the previous decades) they may have been more willing to question their planting decision to rely so heavily on a single species of trees no matter how attractive its historic attributes.
Doubt is not a pleasant condition
but certainty is absurd.
With hindsight bias it is easy to question the decisions made by experts in the past, but we also need to persistently question our own current beliefs and assumptions about investing and portfolio construction. One of the best ways to accomplish this is to continually review third party research. Seeking out research, especially that which is contradictory, is helpful to make our investing process more robust. The following two research pieces are good examples of how unique perspectives can effectively question standard investing dogmas.
1. Over the Long-Term Stocks Beat Bonds
Rob Arnott, the founder of asset management firm Research Affiliates, authored an article for the Journal of Indices back in 2009. The article entitled Bonds Why Bother?, questioned the idea that over long periods of time stocks always beat bonds. By combining a variety of datasets, he created U.S. stock and treasury bond indices going back to 1803. He surprisingly highlights three long eras where US Treasury investors would have been better off than US stock investors.
68 Years – From 1803-1871
28 Years – From 1929-1949
41 Years – 1968-2009
It takes considerable knowledge just to realize the extent of your own ignorance.
2. Stocks for the Long Run
Aizhan Anarkulova, Assistant Professor of Finance from Emory University, lead the research paper “Stocks from the Long Run? Evidence from a Sample of Developed Markets”. This paper reviewed the historical record of stock market performance of thirty-nine developed countries over the period from 1841 to 2019. This broad-based review helps us to think more probabilistically about potential returns and not just look at the U.S. and assume the past is prologue. The whole paper is insightful but one of the key takeaways is remarkable: they estimate a 12% chance that a diversified stock investor with a 30-year investment horizon will not achieve a positive real return.
The point of discussing these examples is not to worry long-term investors but to emphasize the insight of Voltaire…we should have doubts. While history can be a guide, it should not be viewed as an exact roadmap to the future. Having doubts about future market performance (or ecological environments) forces us to build resilience into portfolios (or landscapes) by not investing based on a specific set of outcomes (or planting just one species of tree which is considered the “best”). It requires us to think about not just the risks that have occurred but also to think about what might occur. Embracing the uncertainty causes us to think differently about portfolio diversification and the need to add exposures that can provide additional layers of protection against whatever the future holds.
The opinions expressed are those of Jason Kirchhoff and McGill Junge Wealth Management as of the date stated on this communication and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.
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