This last week in Northeast Wisconsin was a difficult one for weather predictors. Thursday it was predicted would produce an epic storm with 8 to 12 inches of snow along with dropping temperatures and high winds. A state of emergency was declared. Schools were closed early and events were cancelled. The result 1 inch of snow and some rain. All in all a normal northern Wisconsin winter day. This is just an example of the ‘predictions’ made every day.
Yet we continue to watch each day to learn what the future may bring regardless of past performance.
In the investment world predictions are made every day by the media. The predictions making the headlines are typically fear based. ‘The next crash will be…deflation…inflation… The President will….GDP will…. Remember it’s the media’s job the sell advertising space and they do that by adding viewers to their newscasts. (Everyone wants to watch a car crash.)
Most investors are looking for stock market returns with Treasury bill risk and research tells us that what these investors earn is Treasury bill return with stock market risk. These investors are stuck. They will watch the financial news daily for hours and get dragged into the hype and horror. You can recognize these investors because they look anxious, depressed and generally unhappy.
Admittedly the equity markets do experience bad performance however over the long term your results will be good if you globally diversify and remain disciplined. However the investors looking to ‘beat’ the market and learn the ‘holy grail’ of investing are continually worried about deficits, the President, unemployment, the dollar….you name it. These people are no fun to be around.
The markets are random and unpredictable period. This means that because an analyst(s) prediction came true has nothing to do with their ability to make correct predictions going forward. The Wall Street bullies have thousands of analysts making predictions every day. The laws of chance tells us that some of these analysts will be right.
However it is a matter of luck and not skill.
The analyst(s) with the correct predictions are asked onto the financial news shows to market their services. The public then showers these lucky analysts with their money. Only to be disappointed with future results.
One curious thing to consider is that the successful analyst(s) are never the same ones asked to be guests on the financial TV shows. Also keep in mind that shows like Jim Cramer are for entertainment only.
Although we know that some of these predictions, like the weather forecast, will come true we have no idea which predictions will be right.
Rather than being consumed by the financial pornography, all you need to follow three simple rules of investing:
- Own equities and fixed income
- Globally diversify
Although these rules are simple most if not all investors have a very difficult time following them. To be certain you follow these rules you will need the guidance of an investor coach/fiduciary adviser.