Everyone wants to know what the market will do next.

Will it continue to rise, or are we destined for a decline?

If it declines, how bad will it be?

It’s natural to want to know these answers because living in an unpredictable world is incredibly difficult.

Surprisingly, uncertainty might even be more difficult to deal with than knowing that chaos is coming.

It sounds odd, but we can see this phenomenon in action all over the place.

Dividend Investing (Part 2) ​In this week's episode, I share three primary reasons why dividend-focused strategies underperform. I also share the long-term performance of ACTUAL dividend funds. Listen Now →

Dealing With Uncertainty

Many of us have either experienced or known someone who had more difficulty dealing with the uncertainty of waiting for medical test results than with the reality of being diagnosed with a serious disease.

The reason behind the supposed relief (if we can call it that) of a formal diagnosis is that they can now formulate a plan for the battle ahead rather than dealing with the incredible weight of uncertainty.

This same psychological phenomenon was documented following the London Blitz during WWII.

At the height of the war in the UK, the city of London was bombed nearly continuously.

The suburbs, on the other hand, were bombed more sporadically.

In the medical studies that followed, doctors and researchers were surprised to find that those living in the suburbs had more stomach ulcers than those living in central London, presumably due to higher stress levels.

Nobody in their right mind would choose to be bombed continuously rather than sporadically...

...but it turns out that the uncertainty around if and when the bombs might fall caused more anxiety than knowing they would.

In our world of investing, we deal with uncertainty in the markets in a similar fashion.

Here's a quick thought experiment to explain what I mean👇

If I told you that a new bear market would start next week, it would last two years, and stocks would decline by 30%, you would probably take immediate action.

Our stress levels would instantly stabilize because we’ve planned appropriately for what we know is coming.

Contrast that with the emotions of not knowing when the next bear market will start...how much the market will fall...or how long it will last.

The inevitable result of this uncertainty is that investors get jittery.

They immediately assume that every 5% or 10% drop in the market is the start of something much bigger.

Even if, most of the time, it's not.

See the difference?

We don't fear the bear market itself; we fear the uncertainty around when it will appear and what it will be like when it does.

This is why I continually encourage you to stay ready, both mentally and financially speaking.

As the saying goes:

While "staying ready" looks different for everyone, making sure that your short-term expenses are covered and not subject to market drawdowns is a big part of the success equation.

We call this creating your "war chest."

This is not me being pessimistic about the future, it's just smart planning.

If you have a contingency plan to weather tough market environments, you will almost certainly make better long-term investing decisions.

So much of our success depends on avoiding self-inflicted wounds.

Given that, we should probably assume that another bear market is around the corner.

It may not be, but it's wise to expect it.

Because if you expect it, you'll stay prepared.

If you're prepared, you won't panic.

If you never panic, you'll probably do quite well as an investor.

And if you do well as an investor, you will be more likely to achieve your retirement goals.

Stay wealthy,

Taylor Schulte, CFP®