Key Takeaways
There’s no shortage of “experts” claiming they can predict the future of the markets and the economy. They can’t.
Having a retirement plan, cash flow plan and investment plan that aligns with your time horizon and risk tolerance will give you a sense of control in any economic climate.
If financial prognosticators were held to the same standard as Romanian fortune tellers, they might be less bold.
Baseball legend Yogi Berra famously said: “It's tough to make predictions, especially about the future.” Many investors believe if they gather enough information and talk to the right people, they can predict the outcome of the stock market. But if top money managers and institutional investors cannot do it on a consistent basis – with their banks of computers and armies of analysts -- why do regular people still believe it's possible?
Unfortunately, this pursuit of the investment holy grail creates an insatiable demand for TV pundits and online “gurus” to fill that need. It’s part of human nature to seek out answers for every challenge that comes our way. As long as there are “experts” claiming to have a crystal ball or black box with all the answers, there will be no shortage of eager followers.
When I hear their predictions in the media, my first reaction is: “Prove to me your predictions about the future have a high probability of success and that the outcomes are going to be consistent. But until you can show me that, why should I take your advice?” But most people never ask this of the so-called experts.
When I asked our chief investment consultant, Mario Nardone, why is he a passive rather than an active investor, he said he prefers to be a healthy skeptic. Every time he reads an article or research report about an amazing financial breakthrough, he’s looking to shoot holes in it. He’s not looking for a magic silver bullet.
Nardone said lots of portfolio managers and investment companies have a huge stockpile of investment vehicles. So, whatever happens to be doing well at the time is what they pull out of their bag and exclaim: “Here’s your solution!” Sure, floating rate funds seem fantastic right now. But what if the Fed stops raising rates as planned and we go into a recession? What if the Fed starts lowering rates again and conventional bonds start increasing in value while the floating rate funds go down? Pick your poison.
Folly Of Prediction
The popular Freakonomics podcast did a great episode about laws in Romania that penalize fortune tellers for making three or more bad predictions. Yes, it’s true. Imagine if TV’s James Cramer (Mad Money) was penalized every time touted a stock that ended up going south? How long do you think he’d continue to make those bad predictions?
If TV pundits and investment professionals were held to the same standard as Romanian fortune tellers, it could make significant improvements in how people manage their investments. Whether using tarot cards, a crystal ball, or sophisticated computer algorithms, you cannot predict the future with any consistency or certainty. Instead, focus on the things you can control like your retirement plan, your cash flow plan, and your investment plan. These tools address the things you can control. They also give you the peace of mind knowing there are guardrails on your potential financial outcomes.
If you want to be successful with your financial plan, you have to sit down and review your income and expenses. You have to assess how long that income will likely come in and from what sources it will come. Think about your expenses will change five, ten, or fifteen years from now. How will those changes impact your ability to reach your goals? Next, do a personal risk analysis so you know how much loss you can tolerate without losing sleep or getting nauseous.
No One-Size-Fits-All Solution
Everyone is different. Those of you who are still working and 10 years out from retirement might be okay with a portfolio that’s mostly stocks. Sure, you’ve taken some hits to your holdings this year, but you don’t need income from your portfolio right now. You have more than enough time to recover the losses resulting from this year’s bear market. But if you’re someone who can’t sleep at night because your $1 million portfolio has shrunk to $700,000 this year – even though you’re 10 years from retirement -- you need to adjust your risk profile, so you have a better sense of control during volatile times like these.
As Psychology Today explained, too many of us demand certainty in a world that is always tentative and uncertain. “It is precisely this unrealistic demand that creates anxiety,” the journal wrote. I’ve found that everyone deals with uncertainty and ambiguity differently. The key is to know where you are on the spectrum and build out a retirement plan, cash flow plan, and investment plan that aligns with your time horizon and risk tolerance. Doing so will go a long way to giving you a sense of control in any economic climate.
Conclusion
If you or someone close to you has concerns about your portfolio’s ability to withstand inflation, recession, and market volatility, contact us at any time to discuss. We’re happy to help.
ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth
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