There’s a great exchange in the original (animated) Transformers movie where two Autobots are attempting to navigate an obstruction set by their nemesis, the Decepticons. The Autobot Kup says to his friend Hot Rod, “The Insecticons are in our way,” to which Hot Rod responds, “Wrong—they’re our way in.”1 A simple rearranging of words reframed the situation from plight to opportunity.
Investors could benefit from similarly reframing the way they think about uncertainty. This unavoidable aspect of life is often interpreted as a pejorative: “I’m concerned about the political situation or economic outlook and what will happen with my portfolio.” In this view, uncertainty is seen as a threat to one’s invested wealth.
The other side of the argument is that risk and return are related. Bearing the risk of uncertainty is why you get paid a return to be an equity shareholder. And the equity premium is a necessary component for many investors to grow savings to the level needed to eventually retire. So, rather than focusing on the potential for a market downturn—which tends to be temporary anyway—investors should focus on the long-term benefits of embracing uncertainty.
Footnotes
1 For anyone not familiar with Transformers lore, Autobots are the protagonists and Decepticons the antagonists, and Insecticons are bug-like creatures that consume standing structures. Not a footnote I expected to write in this newsletter.
Equity premium: The return difference between equities and a risk-free asset such as Treasury bills.
Wes Crill, PhD, Senior Client Solutions Director and Vice President
Dimensional Fund Advisors
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