After the events of Friday evening with the bombardment of Iran by the US and some of its allies, the world is in a different spot than it was on Thursday.

Hands up if you went to a dinner party over the weekend and the topic of the war on Iran didn’t come up?

The global investment markets fell in the leadup to today’s (Monday) opening bell (and at the time of me editing this, they’re largely flat overall) with sizable divergence by industry in sector.

What’s an investor to do in this time of uncertainty?

The first thing to remember is something I repeat all the time – a very remote few are going ‘trade’ or zig and zag their investments through this or any market successfully, and the ‘success’ vs. ‘luck’ conversation can be saved for another day.

So let’s say that you just deposited your RRSP contribution, it’s now sitting in your RRSP and you’re wondering whether to invest it in alignment with your financial plan (likely what was agreed upon last week) or to sit and wait until there is more ‘certainty’ in the investment markets?

The gut feeling is that war is bad, bad news is bad for investments, and markets will likely dip in the coming days/weeks/months – whatever your gut has chosen for your timeline.

Surely our guts are never wrong with his sort of thing.

It’s pretty much the universal quick response.

The problem with the gut saying ‘oh the markets are going to fall in the near future’ is that it’s not the way the markets actually work.

It’s the tug of war between our emotional brain and the logical one playing out.

If there was a consensus that the markets would fall over the next week…they would have fallen already.

Let’s say that there was consensus that the markets would fall this week and a portfolio valued at $100 at the end of trading this past Friday would bottom out at $90 on Friday before beginning to recover.  If that was the consensus, everyone would be already be selling their portfolio down to the $90 level (where there would be no profit to be made by selling and re-buying on Friday).

Research Supports This

In 1965 the Efficient Market Hypothesis was put forward by Eugene Fama in his PhD dissertation at the University of Chicago and became one of the central theories of finance.

The EMH is the idea that stock prices include all available information.  This means that as new information comes out – like earnings, economic data, and the start of a war – the prices on stocks and bonds etc… quickly adjust.  Because of this, it is very hard for investors to consistently ‘beat the market’.

Prices move because of new information.

The prices today reflect all information available prior to the initiation of the war, and the developments since up until the point in time that you are reading this.

What will tomorrow’s price be?

We don’t know that yet.

Financial markets follow what is called a ‘random walk’ meaning that price changes are unpredictable and move in a way that resembles randomness.  Louis Bachelier (1900) and Paul Samuelson (1965) have proven this mathematically.

In other words: tomorrow’s price = today’s price +/- new information.

So getting back to the initial question: ‘if I just deposited my RRSP cheque and it’s sitting in cash right now… should I buy now or hold off for later?’

Keep in mind these key points:

  1. Nobody is going to trade through the War in Iran or Trumps term in office (or any leader for that matter) successfully.
  2. Prices are ‘efficient’ meaning they reflect all available information (said another way, people have already reacted to the bombings).
  3. Tomorrow’s prices will be different than todays based off new information that will reveal itself between now and then.  Same goes for every day afterwards.

Final point – the industry will try and scare you.

Be weary of any commentary that makes proclamations about which direction the market is going, which investments will win or lose, or why you need to change course with your strategy.

Theses messages are not coming from economists, they’re coming from marketing departments who ignore the studies mentioned above to present their firms as your saviors.

While the economists should know they’re statistically incompetent at predicting the future, the marketing departments are willfully unaware of this.

This was pointed out by Dunning and Kruger in their 1999 Journal of Personality and Social Psychology study: ‘Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments’.

In other words, the sharp dressed and silver tongued person on TV talking about what’s going to happen next in the market is less likely to be correct the more confidently they are.

Your Context is the Key:

Always think in terms of your financial plan, and the purpose behind it that you are working towards.

The recent war with Iran is the news of the day, and I hope this conflict resolves itself with minimal innocent lives lost.

The sad reality is that this likely won’t be the last time we’ll see armed conflict over the course of your financial plan.

Further takeaways:

Ben Felix has this handy video walking through the thought of invest now or invest over time (dollar cost averaging) which talks about the historical results of delaying investing.