Risk and Uncertainty Are Not the Same

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Recently, I have been thinking about risk and uncertainty a lot. After our experience this year with COVID, the tumultuous headlines, the election, and a possible vaccine on the horizon, uncertainty is something to which we grow more and more accustomed. We often use the terms interchangeably, however they are not the same.

Risk is when we know all possible outcomes in advance and can apply a probability to those outcomes. Flipping a coin is a great example of risk. 50 percent heads, 50 percent tails.

Uncertainty is what we live with daily. It is not knowing all possible outcomes or probabilities in advance. Sounds more like real life, right? We never have perfect information. We almost never know all possible outcomes before we make decisions, but we still make them.

Markets are like that, too. It is very hard to measure the risk of any market because of uncertainty. However, we can still make decisions about how we should invest, regardless of what we may think of the market in the short term future.

Here are some tips to follow before making investment decisions (or any decision that involves uncertainty):

  1. Get facts - having information helps you make better decisions

  2. Check in with your instincts - what are they telling you?

  3. Then, tune out your instincts - do you have mental baggage that would cause your instincts to point you in the wrong direction?

  4. Accept in advance that progress is not a straight line

  5. Know when to change course