At the beginning of every year, the financial press has a field day with the forecasts for the year ahead. An extraordinary amount of energy is spent on an exercise that is even less accurate than weather forecasts. In fact, they are not forecasts at all. They are wild guesses.
Most of the energy is of course spent on warning us of the imminent doom which may cause declines in the financial markets. But surprisingly we don’t have to guess that global share markets will decline this year. Every year global share markets fall by 5% or so. At some point every year or two, our investment portfolio values decline by 5-10%.
Occasionally, equity markets decline dramatically, by up to a 20% - it happens every three to four years. This is normally because expectations have run ahead of the fundamentals – people become too optimistic about the near-term prospects. And it normally happens because investors have become accustomed to the too-good-to-last most recent returns and then project that into the future.
We don’t need to spend energy to guess about market declines – we know they will come – almost like tides going in and out. However, we are more likely to be more accurate in our prediction for any given year by guessing that equity markets will trend higher. Economic fundamentals in modern economies and history point clearly to this long-term upward trend.
So, by starting this year by saying that my investment portfolio is likely to end higher than lower this year, I have a better chance of being right, on average over the long term, than any of the wild guesses by so-called experts. Note: I may be wrong this year, but over time, I have a better chance of being right than wrong, and I have a better chance than the person who warns us of gloom at the start of every year.
It is astonishing to me that the so-called experts persist, particularly as their guesses have no worth. What is so difficult about accepting far more predictable patterns, rather than engaging in useless forecasting exercises?
The answers lie in human nature. Humans want to believe in certainty. We so desperately want to feel surer of our future that we will even turn to make-believe rather than accept that the near future is wildly uncertain. We want to believe that there are blessed experts who can take the pain of uncertainty away.
It would be comical or entertaining, if it wasn’t so damaging to our financial planning and the provision of our future needs, because it causes people to delay savings and investments to later dates when it might feel safer. That day never comes. It never feels easy, more predictable, or less frightening to make investments and it is usually better to make that investment now rather than later. The more time your investments have to grow, the better the chances are that they will meet your future needs.
The science lesson from behavioural studies is that we should avoid this trap – rather than engage in the useless guessing game of financial market predictions, just invest according to rules. Rules take the danger of human nature out of your investment decisions. Rather invest sooner, in smaller regular amounts, through automated deductions where possible. And then stay invested.
In investments, it doesn’t pay to be superhuman. Rather admit that we are humans investing in a wildly unpredictable and frightening world. And then invest regardless.
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//04 February 2022.