by Jarrod Musick, CFP®
“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, 2002
I often think about this concept of the unknown unknowns as it relates to investment management. The difference between success and failure is usually found in how we absorb the impact of these unpredictable events. By virtue of the fact that they are unknown and that we do not even know that we are ignorant of them makes them very difficult to prepare for. Think about Bitcoin for instance. Unless you were a cryptography expert in 2012 could you imagine that a digital currency would enter the world a year later and within five years rise to a total market capitalization of $100M. An unknown unknown.
The beauty of investing is that we can prepare even for the surprises and storms we do not know to watch for. We prepare by remaining disciplined and consistent in our investing approach. By ensuring that portfolios stay diversified so that no single storm can sink all ships. By ensuring we are aware of upcoming needs for cash and having adequate cash available to cover them for an extended period. Each of these are valuable pieces of preparation for the unknown unknowns that will inevitably come to pass.
In this time of so many disruptions and unknowns we continue to focus on our process. In the next few weeks we will embark on our capital market assumption review. That review begins our reassessment of all client portfolios for the year to come and we begin with a review of outside assumptions about returns and volatility for each asset class. This information becomes our basis for researching individual investments and constructing portfolios. While investment management is something we continue to work on each and every day, the next few months are the foundation setting for 2021 and we are excited to put our research and modeling hats on again.
Being disciplined and well prepared for surprises and storms is our very best prescription for the unknown unknowns we are bound to see.