Will the markets go up, go down, go sideways, and by how much? If you’re like me, you’re reading many of the forecasts that pundits publish this time of the year. So I decided to publish my own.
Before I get into my market forecast for 2018, I want you to consider why forecasts are so alluring to investors like ourselves. What is the force that influences us to make decisions based on forecasts? There is ample evidence that expert forecasts are correct only half of the time, yet we are still attracted to them. Why?
You may not be able to put your finger on it because our attraction to forecasts is largely subconscious. It boils down to how the brain likes to operate. Our brain is a planning machine; it finds much contentment and peace in being able to plan. When we don’t know what the future holds, we can’t plan with certainty. This bothers the brain. So it, subconsciously, seeks for some sort of certainty. And forecasts, especially confident ones, provide an illusion of certainty.
We are subconsciously attracted to forecasts even though we consciously recognize that forecasts historically have not been very accurate. We fix this problem by giving greater weight to forecasts that 1) confirm what we want to happen and 2) are more confident than others. But these don’t improve the accuracy, just our perception of accuracy.
I am quite confident in my forecast for 2018. To be fair, it was the same forecast I’ve had in prior years (though this is the first time I’ve actually published it), and will likely be the same forecast in future years. Why wouldn’t I keep it the same? It has an overall accuracy very close to 100%:
- The economy/market will do something that surprises us
- Investors who watch or look at the markets or their portfolio quite often will experience more stress and greater unhappiness than those that don’t
- No one will be able to predict what will happen perfectly, but it will all seem obvious in hindsight
- You will wish you owned more stocks if the markets are going up, and wish you were holding more cash if the markets are going down
- Your diversified portfolio’s return will not match the market’s return, will lag it in a rising market environment, and probably outperform it in a falling market environment (but you’ll find cold comfort in an outperforming portfolio if it’s still going down)
- The pain of missing out on bigger gains will outweigh the pain of bigger losses
- You will be tempted to abandon your plan at some point based on expert forecasts and/or short-term market performance
- Investors that focus on those things they can control (i.e. your reaction) will have a better investment experience than those that focus on what they can’t control nor predict (i.e. What’s XYZ going to do?)
- Investors who abandon their plan to chase a “winning investment” or “sure thing” will have lower long-term returns than investors who stick with their plan
You may be frustrated that my forecast doesn’t say anything about where the market will go or what sector to invest in. If so, then I’m sorry to disappoint you. But understand that in my 30+ years advising clients, I have learned that the best results are obtained by those who have the discipline to ignore the distractions and stick with the plan we have developed.
If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.
I wish you all a prosperous, fulfilling, happy and healthy 2018. Thank you for allowing me to be your trusted partner along the journey.
Source: Information provided by The Emotional Investor, a Member of The Behavioral Finance Network. Used with permission.