The cost of waiting for certainty

This article was first published in Investment Week.

In theory, financial markets aggregate probability-weighted expectations about future outcomes. In practice, prices are also influenced by investor psychology and market dynamics. Uncertainty is therefore intrinsic to investing, and managing it is central to achieving good outcomes.

I frequently meet clients who worry about committing capital. The world is an uncertain place, and it always feels safer to wait for more certain times. It is one of the most understandable instincts in finance. It is also one of the most consistently costly.

Right now, the case for waiting feels unusually compelling.

To focus on just one issue: the US-Iran ceasefire appears fragile and, more importantly, does not yet look like a sustainable equilibrium. Continued disruption in the Strait of Hormuz is not simply a geopolitical headline; it maintains pressure on commodity supplies and complicates the outlook for central banks and markets. How should investors, and central banks, weigh the growth risks from higher energy prices against the inflation risks? Markets have moved to discount tighter policy from the Bank of England and the ECB but have been slower to price a similar response from the Federal Reserve, despite stronger US growth and tighter labour markets. The Fed is in transition – with a new chair incoming its reaction function is harder to predict.

None of this lends itself to easy answers. The siren calls for procrastination are loud.

We frequently talk of markets “climbing a wall of worry”. It is an apt expression. This year I have often reassured clients that the most dangerous markets are not the ones full of worry, but the ones where worry has vanished. That is when investors become over-confident, exuberance stalks markets, and seasoned investors should become more wary.

So, what is an investor to do today?

The most dangerous markets are not the ones full of worry, but the ones where worry has vanished.

The answer is not to pretend uncertainty can be eliminated, nor to avoid risk altogether. Risk is the price of return. The job is to take risk deliberately, build portfolios that can survive more than one version of the future, and then be willing to change them as the odds change. That is where multi-asset investing matters. The aim is not to forecast the future with spurious precision, but to recognise when the balance of probabilities is shifting and adjust accordingly.

This has become harder because asset classes do not always behave as investors expect. For much of the post-financial-crisis era, high-quality government bonds were the natural ballast in portfolios. When growth disappointed, yields tended to fall and bond prices rose. That negative correlation made diversification feel relatively simple.

Today, it is less simple. If the shock is inflationary rather than deflationary, equities and bonds can fall together. Diversification still matters, but it cannot be set and forgotten. Bonds may protect if growth weakens, but not if inflation expectations rise. Commodities can help in a supply shock, but not necessarily in a demand shock. Equities can keep rising if earnings are strong, but high valuations leave less room for disappointment. Cash provides optionality, but too much of it can become a drag if markets continue to climb the wall of worry.

The point is not to own a bit of everything. It is to know why you own each exposure, what returns it delivers or what risk it mitigates, and whether you are still being paid to hold it.

This is also why scenario analysis matters. Investors often ask, “What is going to happen?” I think the better question is “what could happen, how likely is each outcome, and what would it mean for portfolios?” Prices do not reflect one future; they reflect a distribution of possible futures, constantly repriced as new information arrives.

Today, one can imagine several paths. To the upside, the ceasefire develops into a “grand bargain”, boosting energy supply to the benefit of consumers and central bankers. To the downside, commodity prices remain elevated, inflation proves stickier and policy stays tighter for longer. Or geopolitical escalation produces a sharper supply shock and a broader risk-off move. The point is not to assign false precision to each scenario. It is to understand where the portfolio is robust, where it is exposed, and where markets may be mispricing the balance of risks.

Valuations matter here too. Some markets, particularly parts of the US equity market, continue to trade on demanding multiples. That does not mean they must fall: expensive assets can always become more expensive, especially when earnings remain strong and liquidity is supportive. But high valuations reduce the room for error. When bond yields are rising, the discount rate applied to future earnings rises too, making long-duration equities more vulnerable to disappointment. That does not mean abandoning equities; it means being selective and flexible. The question is not simply whether to be “risk on” or “risk off”, but where compensation for risk remains attractive.

The conclusion, then, is not that investors should ignore today’s risks. Nor is it that they should retreat to cash and wait for certainty. Certainty is not coming. The better response is to take risk deliberately, diversify with intent, and keep adjusting as the facts – and the prices – change.

Markets will always offer reasons to wait. Successful investing requires distinguishing between uncertainty that demands caution and uncertainty that demands discipline.