“It’s tough to make predictions, especially about the future.” ― Yogi Berra

The pundits, for a long time, predicted that Hillary Clinton would win the election. The futures market, in the middle of the night after the election, predicted that the DOW would plunge by 800 points. Both were stunningly wrong and both provide valuable lessons for investors.

Lesson 1: Everyone likes to make predictions, but not everything can be predicted.

From political pundits on the Sunday talk shows, to CNBC market “experts”, to your friends, family, and neighbors, the temptation to predict the future is almost universal.

People learn from experience, and from our past experiences we tend to think about what will happen in the future. It is fun to make predictions. When you get it right, such as the Cubs winning the World Series, you feel smart and proud. When you are wrong, you can come up with all kinds of rationalizations (a rain delay, an unforced error, a bad call by the umpire, etc.) as to why you are still smart despite the results. You can see this happening right now in the aftermath of the surprising election. (A great book on this subject is “Expert Political Judgment: How Good Is It? How Can We Know?” by Philip E. Tetlock.)

There are some areas of life that can be predicted. For instance, tomorrow’s weather can be forecast with a high degree of certainty. But the weather next year is another matter. Therefore, the more randomness comes into play, the more difficult it is to make a useful prediction. At the extreme, it is foolish to place a bet on a roulette wheel based on the past numbers. The result of a single spin of a fair wheel is completely random and therefore unpredictable.

The election and the recent market movements have highlighted the hazards of relying on “expert” predictions. If an investor had traded on fearful prophecies the night of the election, she could have lost a bundle in the markets. Trying to guess what will happen in the markets can result in a painful and surprisingly quick way to lose your savings. The markets, in the short term, as we have seen again and again, tend to be random. (See “A Random Walk down Wall Street” by Burton G. Malkiel.)

Lesson 2: Avoid predictions and focus on the long term by developing a plan.

Investing is a long term project. If you need money to buy a car in the next two months or take a Roman holiday in five months, that money should not be invested in the market. The short-term returns of the market are too random for you to risk money that you know you will need soon. Focusing on your long term goals, like retirement, is the best way to combat the short-term fluctuations of the market. When you have a long-term investment plan you will have no need to make, or listen to, dubious predictions regarding what the market will do this week, this month, or this year.

There is no substitute for having a long-term investment plan and having the fortitude to stick with it. A fiduciary financial advisor can provide both. An independent investment advisor can help develop a long-term financial and investment plan tailored to your particular situation. And just as importantly, when times are uncertain and unpredictable, and you are fearful, your advisor can help you stick to your plan with phone calls, emotional support and long-term financial advice.  

A long-term investment focus will always beat a short-term market guess.


Arden Rodgers is a financial advisor in New York, New York. Questions or comments? Check out his GuideVine profile to watch Arden’s videos and learn more.

Categories: Investments