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Why Economic Uncertainty Doesn’t Matter

Wave crest and trough
This post, Why Economic Uncertainty Doesn’t Matter, was featured by Abnormal Returns on 4/27/2023.

Economic Uncertainty Reigns

I read the news each morning after finishing my coffee and sorting through my emails. As of late, I have noticed a trend: The headlines ominously tell of impending economic uncertainty and turmoil looming over America and the broader global economy.

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Reading such news flashes doesn’t inspire confidence in the foreseeable future. But as someone who works part-time in finance, I remain indifferent about economic crests and troughs, which are simply part of how the markets work. 

With each business cycle, the stock market rallies as the economy’s breadth increases, propelling business valuations and investor account balances higher. 

Eventually, economic productivity and company valuations crest, and when this happens, a recession usually follows as the market contracts and layoffs occur, subsequently causing investor account balances to decrease.

The business cycle is very similar to waves in the ocean which crest and trough over and over again, day in and day out.

While recessions are terrifying to someone too caught up in the moment or with a limited understanding of the economic cycle, they are temporary. If you fail to realize that this downturn and uncertainty will pass and give way to a future with renewed prosperity, you will surely panic too!

Individual economies and business sectors may see declines that cause them to fizzle out, but that only reinforces the importance of a globally well-diversified investment portfolio for everyday investors like you and me. Learn more on why Buying International Stocks Is Essential, But Not Exciting.

When I worked at my prior employer, I saw firsthand how people would blind themselves from the future through a panic that engulfed their present world, insisting that turning off their 401(k) contributions and moving their money to cash was the prudent decision. 

But such judgments are not rational and only inflict self-harm more times than not since no one can reliably predict the bottom of a downturn until it has passed. It is also why dollar cost averaging through periods of exuberance and gloom alike is imperative. 

Sometimes, you will see gains that appear never to end. Other times, it will seem that your investments will never stop bleeding value. Still, both are temporary blips in the financial ocean that constantly sways with crests and troughs. 

A wave pattern overlaid atop the S&P 500 going back 90 years, which has been adjusted for inflation and using a log scale to allow easier comparison of past/current crests and troughs. Grey areas reflect prior recessionary periods.

Instead of focusing on fear, try to see the bigger picture and invest according to your risk tolerance and time horizon. That, coupled with dollar cost averaging and time, is a nearly surefire way to build wealth and financial freedom according to experts.

And while someday the world and global economy will likely close their final chapter, that isn’t worth dwelling upon. Instead, focus on what you can control by sticking to your retirement compass and sailing ahead to financial freedom.

As always, have a great day!

Mile High Finance Guy

finance demystified, one mountain at a time

mile high finance guy

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