The value of security

At the beginning of August, uncertainty gripped the financial markets. Sentiment changed from one day to the next. The supposed reasons for the wave of selling were quickly identified: the appreciation of the yen, a poor US employment report and consequent fears of a recession. The reaction to falling stock prices was correspondingly emotional.

This episode shows how quickly a sense of security can be lost. But what gives us security? Security is a basic need with many facets, but not all people feel it in the same way. Be it in relation to life and limb or in relation to investment decisions: Uncertainty and risk get in the way of security. That's why we asked ourselves in our investment magazine telescope how uncertainty can be reduced.

The first insight is that uncertainty is not the same as risk. Risks can be calculated with probabilities because the variables are known. Uncertainty is different and leaves room for misinterpretation, emotion and distorted perceptions. If you don't know how to deal with an uncertain situation, it can lead to feelings of powerlessness or even loss of control. Depending on the circumstances, this can lead to anxiety, stress or even panic.

These emotional reactions can exacerbate the discomfort and lead people to draw the wrong conclusions. For some people, a way out is to avoid uncertain situations as much as possible, or at least try to minimise them. A psychological effect plays a role here, as people are more sensitive to potential losses than to equivalent gains. Uncertainty brings with it the possibility of negative outcomes. But why avoid it altogether? For investors in particular, such an attitude would be of little use. Uncertainty is as much a part of investing as risk.

However, uncertainty often leads investors to make poor decisions. We have analysed five typical pitfalls. For example, whether it is still worth entering the market when a stock or index has risen by 10 per cent since the start of the year. Or the trading days with the biggest daily losses: Does it make sense to get out of the market at all? Data and statistics show that the first question should be answered in the affirmative and the second in the negative.

Investing is like life: You can't do it without uncertainty and risk. But a sober assessment helps to achieve the highest possible degree of security.