Confidence Impact on Investing

Investing in any manner is a reflection of confidence in future outcomes. This applies to investing in a private business or a public company and also various ways of lending funds. Investors always consider the upside, but considering the downside could be more important, although it is not as much fun and sometimes could be gruesome. Following are some things to consider to assess future confidence which is an important part of risk assessment.

Future outcomes depend on many factors with many considerably beyond your control. The risk of a pandemic was not even a glimmer of a thought when 2020 started and it quickly grew to a global shutdown, closure of many businesses and immediate uncertainty of the future. The pandemic also caused an extremely quick mobilization to attack it and as that developed, confidence started to return.

Another beyond the realm of imagination was an attempted takeover of the government and a suspension of the U.S. Constitution. How you view this or whichever “side” you are on is not that important to my discussion, but you have to consider the state of your liberty and financial security if the attack on the Capitol on January 6, 2021, was successful in imposing a new slate of electors that did not elect Joe Biden. However, this malady is common in too many foreign countries and certainly affects investments and savings there. Further the prospect of Congress failing to act quickly on a debt limit extension has already caused an erosion of confidence in the U.S. dollar. What would have occurred if they failed to come to an agreement?

Unpreparedness for wildfires and accompanying hurricane-force winds in Maui also caused unimaginable damage and death. In this day and age, the Russian attack on Ukraine caused great disruption and a quick mobilization of resources and spending, on both sides, which had its independent effect on confidence certainly in those two countries. There are also many other events that could cause rapid changes and a destruction of confidence. Following are some more “conventional” triggers that could affect confidence.

More normal or typical causes of confidence are interest and inflation rates and how government resources are used to try to stabilize them. No, or incompetent, attempts result in less investment and prospects for growth. Honest and directed attempts, even when unsuccessful, can keep confidence from eroding. Consumer spending is a great barometer of confidence. Dropping confidence results in reduced spending which causes a drag on the economy and confidence. This hastens a drop in business investment for growth and expansion of businesses. So does stalled supply chains and product shortages. Remember how you reacted at the beginning of the pandemic when there was a shortage of hand sanitizer and toilet paper? This also affects the size of inventories which then affects the speed of turnover of raw materials into sales and the availability of product choices.

The level of employment and the availability of the right type of labor also affect confidence. Rising salary levels end up causing price increases which can affect sales which leads to affecting confidence levels. Opportunity for employee advancement further affects confidence.

Real estate is another complicated issue as is most everything else. Raising real estate values leads to a drop in property sales and increased rents. It could also lead to overbuilding and increased supply of properties for sale and is typically accompanied by increased, and likely excessive, debt. Inner city rent increases can force people to move to lower rent areas removing some types of employees from the workforce availability which could further lead to reduced investment in those areas reducing real estate values. This also affects the high-rent districts because if businesses are forced to leave cities, these apartments would no longer be in as high of a demand. Higher rents have also been causing some younger people to leave the rental market by moving back home, with or without jobs. The economy runs in cycles. In the recent past the downside of these cycles has been tame here, but not so in many other countries. We are now in an intertwined global economy and it seems everything affects everything, but in different degrees and with different timing.

Once a trend develops it accelerates the part of the cycle it is positioned on, and the trend starts to feed on itself.

I do not know much more than anyone else about what the future will bring. However, I see relative calm here in the United States and a trend toward panic in China. And whatever happens in China will have consequences here, as what happens here will have consequences there. Hopefully, our and China’s leaders will recognize this. An economic war cannot have a victorious combatant; it can only have losers. The repercussions of this will affect confidence levels.

I hate to write doom and gloom articles, but reality is not always sunny. Part of investing is recognizing risks and developing contingency plans to deal with them. Sometimes it is easy and other times very difficult. What happens beyond your control will happen, but how you are able to provide for, handle and adjust to the changing circumstances will determine your chances of success.

Factor into your planning a risk assessment and preparedness toward unforeseeable circumstances, and then your choices won’t be just doom and gloom but will include rays of sunshine mixed in with it.