After lurking on many personal finance blogs for years, David launched FinanceSuperhero.com in March 2016. He is on a mission to “Restore Order to the World of Finance.” He would be honored if you would check out his blog, follow FinanceSuperhero on Twitter, and “Like” the FinanceSuperhero Facebook page.
Note: Special thanks to Matt for allowing me to share this piece on DistilledDollar!
A GUARANTEED STOCK MARKET PREDICTION
Over the past several weeks, the stock market has gone for a wild ride. Following Great Britain’s decision to leave the EU on June 23, the “Brexit,” the S&P 500 fell 5.3% leading up to the close on June 27. This past week, the S&P continued its rebound and recorded its fourth consecutive record close at 2,163.75, an increase of 2.3% from June 23 and an 8% increase from the post-Brexit decline.
Meanwhile, further chaos has unfolded abroad, this time in Turkey and France. According to a CNN report dated July 16, the Turkish Lira, the Turkish national currency, has declined by 5% in value compared to the US dollar in the wake of an attempted coup. In France, terrorism has negatively impacted the travel and airline stocks.
While there is no such thing as a “certain time” for investors, the current market certainly qualifies as a time of great unpredictability.
In the midst of such uncertainty, I feel prepared to make a stock market guarantee.
A MARKET GUARANTEE
Here is my bold proclamation:
I guarantee that nobody knows what is going to happen with the stock market in the future.
Right now, many of you are shaking your head in disgust because you were hoping for genius investment advice. Someone of you probably agree with this assessment. Others probably feel this statement is 100% false.
Before we go further, let’s examine a few pertinent statistics.
Statistically-speaking, the stock market as we know it produces total positive returns approximately 66% of the time since its inception in 1896. Sometimes, S&P 500 gains are enormous, such as 49.9% in 1933, 52.56% in 1954, or more recently, 32.15% in 2013. On the other hand, losses can be equally severe, such as -43.84% in 1931, -25.90% in 1974, and -36.55% in 2008. For more examples of the ebb and flow of the market, see this chart.
In each of those years, I am certain that many investors established their market projections only to witness the exact opposite come to pass. As William A. Feather said, “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” Yet, what an investor thinks or feels is far less important than the actual results which an investor achieves.
And in spite of decades of research and statistics, investors continually make investment decisions based upon past performance. Andy Martin, investor and author of Dollarlogic: A Six-Day Plan to Achieving Higher Investment Returns By Conquering Risk describes the ineffectiveness of such an approach:
When I first got into the investment business, I made the same rookie errors that all brokers make.
One the biggest is to assemble yesterday’s star performers into a buy list for your clients. . . Boy, was I good at predicting the past! My list of favorites was always last year’s top performers. This is like picking next year’s Oscar winner from last year’s list. In 86 years of Academy Awards only Spencer Tracy and Tom Hanks have ever won consecutive best actor awards.
That’s probably a better record than picking top performers for stocks or mutual funds.
Martin’s sentiment is particularly true in the realm of mutual funds. Yesterday’s winners often become today’s losers and vice versa. In reality, a wise investor should consider many criteria beyond past performance, such as fees, risk, expense ratio, and expected time in the market. Even in doing so, however, attempts to predict the future performance of an investment will likely lead to disappointment.
A SENSIBLE INVESTMENT PLAN
So if we can’t predict the future, and past results are not necessarily indicative of future gains, how should we invest?
Consistently. Boringly. Over time.
If the act of doing so did not increase the risk of identity theft, I would advise the average investor to throw out their investment statements before even opening them (please shred all sensitive information). For all but the most astute investors, knowledge of what is happening with your investments on a monthly or even quarterly basis is dangerous and possibly futile.
Unfortunately, the more an investor knows and the more he or she learns, the more prone to making stupid moves he or she will become. Suddenly, he or she will begin to do foolish things like time the market, sell high, and buy low.
Please note that these actions are not dumb in and of themselves. What is dumb is thinking that you CAN time the market, that you CAN sell high because you know when a peak has been reached, and that you CAN buy low because you know when the bottom has been reached. A quick look below at the performance graph of the S&P 500 from January 2016 through the present illustrates these principles.
By all means, do not be afraid to be consistent and boring in your investment choices. Buy and hold for the long-haul. Purchase low-cost index funds, ETFs, and target date funds. If you want to do so, follow Matt’s example and give yourself a 5% “play” fund. But above all else, remember to avoid overconfidence. As Matt states in his “Start Here” page,
“We don’t need to have a high IQ to become financially independent, we only need to avoid real stupid mistakes.”
How has your portfolio fared in the wake of Brexit and the recent events in France and Turkey? Do you attempt to “time the market” or have you done so in the past?