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False Negatives and False Positives

Remembering the lessons of history

Back in August of 2021 we were just starting to come out of the Covid crisis. Things were still tenuous and there was lots of nervousness and uncertainty – as is often the case in life! At that time, we chose to run a blog post about “false negatives and false positives”. We’re rerunning this post this week as while the times are different, the lesson still applies. I hope that you and yours have an awesome Easter Holiday!

COVID-19 versus investing?

Unless you live under a rock, COVID-19 has had a HUGE influence in your life over the past year and a half. Recently Kenneth French shared that he and his wife had spent almost a year in isolation “avoiding false negatives by acting as if everyone else was positive.”

In this case, they were concerned about contracting the illness and, accordingly, chose to isolate. In so doing, they avoided encountering anyone who WAS positive but tested/showed negative. They avoided what he called the “false negatives.”

  • Conversely, in the investing space it is critical to avoid the “false positives.”

All too often we hear some pundit trumpeting the allure of the “latest and greatest.” Low and behold over time, “the next best thing” does not pan out. It proves to be a “false positive.”

False positives - what’s the point?

The point is not to argue for or against isolation. For or against the vaccine. For or against public policy. For or against any particular investment.

Instead, the point is to accentuate the REALITY of “false negatives” and “false positives.” They can and do exist. And they can and will impact your investment portfolio if you do not exercise a proper degree of caution.

  • One thing that I personally do NOT see as a “false positive” is the long-term growth of the world economy.

The concept that all of the economic growth we have seen since the beginning of mankind is an illusion/is something that will suddenly reverse itself is crazy—in my opinion.

If I’m right, then the reality of economic growth suggests that a reasonable investment strategy is one predicated on partaking in this growth.

So what?

The key then is to stick to the fundamentals. I’m going to beat my “Investment Policy Strategy” (IPS) drum AGAIN! An IPS outlines what your goals are, what your cash flows are, what you are buying, and what you are expecting in terms of volatility and risk.

Shaping an investment policy around reality versus “false negatives” and “false positives” is critical. Much of what you hear daily regarding investing is going to fall into the “false negative” or “false positive” areas.

Ignore the financial press and stick to your guns (your IPS!) and you will be well served.

You can read more about this topic in the attached article:

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Curt Stowers

Curt Stowers

Curtis Stowers helps individuals and families across the United States grow their financial assets, particularly in the Naperville, IL region. He is a Certified Financial Planner, holds a Ph.D. in Industrial Engineering from the University of Illinois, and is the founder of F5 Financial.