The Folly of Making Financial Predictions

At this time of year the money pages in most major newspapers are full of predictions for the year ahead.

Often these are predictions about where the stock market might be in 12 months’ time or the five stocks you must own today.

The problem is that these predictions are too often wrong. It is nigh on impossible to predict where the market will be in 12 months’ time. The number of variables that can affect markets is just too great to be able to take them all into account. Too often, there are surprises that no-one could possibly predict, for example, the global pandemic or Russia’s invasion of Ukraine.

The economist, John Kenneth Galbraith said, “There are two kinds of forecasters; those that don’t know, and those who know they don’t know.”

Long Term Approach

If we can’t predict what the market will do in the short-term, the best course of action is to put in place an investment strategy that is designed to deliver a good investment outcome over the long term.

For example, over the last approximately 97 years, the US Stock Market has delivered an annualized return of around 10%. However, there have been large fluctuations in the returns achieved in any one year.

Investment Principles

There are 6 fundamental principles we believe an investor should adopt to help achieve a successful investment outcome:

#1 – Ensure that your portfolio is suitably diversified, for example, by asset class or geographical region.

#2 – Avoid market timing – once you are invested, stay invested. Missing the best few days of market returns can have a huge impact on overall investment performance.

#3 – Keep an eye on costs – high charges can eat into investment returns.

#4 – Minimise taxes where possible – again, these can eat into investment returns.

#5 – Be aware of where your money is invested. Is it aligned with your values and is it having a positive impact on people and the planet?

#6 – Ignore the noise and stick to the plan.

The Importance of Financial Planning

Having a financial plan in place with a clear strategy on how you can achieve your financial goals is vital to help you manage the behavioural and emotional side of investing. Too often investors get ‘spooked’ by the noise, they make short-term emotional decisions and fail to take into account the bigger picture often leading to worse investment outcomes.

Knowing that you are going to be financially comfortable, whatever happens to the markets, provides the peace of mind necessary to take a long-term view with your investments.

It is far better to review your financial plan than it is to listen to the investment noise prevalent at this time of year.