"Reports that say that something hasn't happened
are always interesting to me, because as we know, there are
known knowns; there are things we know we know. We also know
there are known unknowns; that is to say we know there are
some things we do not know. But there are also unknown unknowns
-- the ones we don't know we don't know. And if one looks
throughout the history of our country and other free countries,
it is the latter category that tend to be the difficult ones."
Donald Rumsfeld, former US Secretary of State for Defence
The above comment was widely reported when made during the
Iraqi War, but its relevance is particularly striking today.
With collapsing oil prices, the unpegging of the Swiss Franc
from the Euro, political issues in Europe and Asia, strange
weather phenomena and the rise of militant Islam, we sometimes
may be forgiven for retreating from the markets and letting
these forces play out. That would be a mistake.
In truth, most of Rumsfeld's anguish centred round those
things which are 'known unknowns'; we are aware that the global
financial system in under threat, but don't know how this
will play itself out and over what time scale. We also know
that terrorism is a real and present threat, but don't know
where it will next manifest itself. We are aware that climate
change is producing extreme weather patterns, often leading
to economic disruption and loss of life, but again: we do
not know when or where. Finally, no-one appears to be sure
what President Putin is up to?
As investors there are a number of things that we can do
to at least blunt the impact of this uncertainty. I would
suggest the following:
- Accept the fact that the world is a dangerous, yet exciting
place. Risk has its rewards but even holding too much cash
has its own risks, especially during inflationary times.
- Don't follow the crowd. One certain way of losing money
is to buy at the top and sell during any sell- off.
- Ignore the noise, and focus on the fundamentals. In this
era of 24/7 news coverage, journalists need to sell their
stories, and bad news tends to make better copy.
- Continuously assess your risk profile. Many investors
underestimate the impact on their wellbeing as well as their
wealth of a market crash. Are you insulated from a currency
- Stress test your investments. Could you survive a market
correction of 40 to 50%? These events do occur as part of
a natural cycle. Remember the crash of 2008 and the subsequent
- In the event of a market upturn, can you view this as
a phase in markets, and not an excuse to cash in your chips?
- Keep your asset allocation intact through the cycles
and in line with your longer term objectives. Let winners
run, but sell your losers when their markets turn down.
Diversify your investments within each asset class. Choose
the best long term performing asset managers. Don't have
all your assets in one currency.
- Don't forget to keep some liquidity within your investments
to protect against bear markets: it is always important
to be able to access cash if needed, and - if possible -
without having to sell shares.
- Drip feed your investments, and enjoy the advantages
of cost averaging.
Even though there are uncertainties out there, and there
will continue to be cycles and volatility, there is a long-term
trend with the stock market. If you ever want to see the impact
of staying in the market over the longer term, look at the
long-term trend of the S&P500 index since the beginning
of 1970 from whence the index has increased by no less than
2,145%! Even over the last 5 years, the index has increased
by 79%. What must seem like catastrophic and gut-wrenching
gyrations, large rises and falls in the market are evened
out over time and carefully selected equities should continue
to comfortably outperform other asset classes by a significant
Regarding the comment by Rumsfeld, linguist Geoffrey Pullum
stated the quotation was "completely straightforward"
and "impeccable, syntactically, semantically, logically,
Now you know!!
Posted: January 2015