A Guaranteed Stock Market Prediction

A Guaranteed Stock Market Prediction

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.

 

Finance Superhero's Market Approach

Not even Doc Brown and Marty McFly know what is going to happen to the stock market in the future. (Credit: Universal Studios)


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.

Finance Superhero's Outlook on the Market

Six month S&P 500 performance data, January 1-July 15, 2016 (Credit: CNN Money)


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?

19 comments… add one
  • Apathy Ends Jul 20, 2016, 7:05 am

    The only market timing o do these days is buying in my Roth after a few down days, it won’t make a big difference either way when everything is all said and done but it makes me feel like I have some control.

    Used to day trade, it was fun sometimes but mostly stressful and a ton of work

    • FinanceSuperhero Jul 20, 2016, 9:42 am

      You’re braver than I am, AE. I am pretty fearful of day trading and to date have not owned a single individual stock in my lifetime. Sometimes I feel like I’m missing out by not having my own play fund, but I tend to be conservative in that sense.

  • Vicki@MSDLifeCoaching Jul 20, 2016, 7:34 am

    I love the idea of the 5% “play” fund to try these things (OK – well, I would be comfortable with about a 2% fund…) I have thought about timing the market a few times – and by the time I got ready to make a change, things shifted and the gains I thought I would make weren’t there. Every time that happens it reinforces not trying to do it again. Jumping in with a small amount would be a good (and safe) way to try it though!

    • FinanceSuperhero Jul 20, 2016, 9:44 am

      2% sounds like a good figure to me, Vicki. I might even be OK with 1%. Just call me Mr. Boring.

  • Chris @ Sleepy Capital Jul 20, 2016, 10:10 am

    Great post, I will be checking out FinanceSuperhero from now on! (and followed you on twitter) This is definitely what is in line with my thinking at Sleepy Capital. Boring is good. I often quote Warren Buffet, “Lethargy, bordering on Sloth should remain the cornerstone of an investment style.” It’s also the cornerstone for why a sloth is the logo for Sleepy Capital. I don’t day trade, but my portfolio (outside of my 401K) is 100% equities and 100% in individual stocks (5 to be exact) plus a significant cash portion.

    As for the recent events, they are worrisome but they don’t affect my investment decisions. I don’t care how my portfolio has fared in the wake of the events since I’m not worried about what happens right now. I just want to be sure I am invested in assets that I know will be more valuable 5 years down the line. I don’t attempt to time the market, but I do recognize the value of knowing that there is business and credit cycle. Being able to recognize when the market is overvalued and when the credit cycle is inflating that is something to keep in mind . I have a significant portion of my portfolio in cash at the moment to take advantage of any market correction that occurs in the next year or two.

    I look forward to reading more of your posts on your blog! Chris @ Sleepy Capital

    • FinanceSuperhero Jul 21, 2016, 10:40 pm

      Thank you, Chris! I’m really glad to connect with you.

      And thanks for sharing the Buffet quote. I usually get my weekly does of Buffet here on DistilledDollar, but I have been reading more articles on The Oracle lately.

      I think you’re very wise to maintain a cash position in these current times. Sam at Financial Samurai is another big advocate for that approach.

  • Stefan - The Millennial Budget Jul 20, 2016, 12:31 pm

    Only time I have ever tried to time the market is when the market sells off. Bought some stocks during Brexit sell off and up 15% so far so can’t complain. Index funds are the way to go for the average person as they are boring yet consistent. Boring is ALWAYS better when it comes to investing so glad you said it. If you meet somebody who knows the market’s future I would be glad to know!

  • Ms Susty Themes Jul 20, 2016, 1:05 pm

    I recently exited a couple of mutual funds I bought before I understood the importance of keeping expenses low. I guess it’s a variation of market timing that I haven’t reinvested the gains yet. Total stock market index seems awfully expensive right now though, so I’m hesitating. I was burned by investing in several things just before the crash in 2008, and I feel like I’m in danger of doing it again. Kinda looking for a good value that fits my strategy and allocation. Only other time I’ve considered timing is choosing to do my Roth IRA conversion for the year during a dip.

  • Jon Jul 20, 2016, 5:29 pm

    No market timing here. Dollar cost average with every paycheck into low-cost index funds. I do dabble from time to time with play money, e.g. writing covered call options.

    I also leave a few percent in my portfolio for interesting investments like commodities or REIT investments. At least it gives me something to talk about at parties! My commodity fund is up over 95% year to date – wahoo!

  • ZJ Thorne Jul 20, 2016, 10:47 pm

    Buy and hold is fine by me – especially since neither of my jobs requires investing knowledge. My portfolio is doing well after Brexit even though it has been highly volatile. I began investing in Fall of 2015 and think I’m being trained slowly to get used to volatility as a norm. I notice it’s happening, but I do nothing different It’s a great habit to develop.

  • John Jul 21, 2016, 1:13 am

    I’ve read many books and blogs on index fund investing and for the most part, I can buy the theory. The major problem I always run into is that past performance is not indicative of future performance. It’s a great story…throw your money into index funds, forget about it and let the efficient market do it’s thing. But when the market is being artificially propped up with debt from the government you have to wonder how long that will be sustainable for. Curious to hear any thoughts around that?

    • FinanceSuperhero Jul 21, 2016, 10:41 pm

      That’s a fine question, John, and I’ll be the first to admit that I don’t have an answer. But you’ve made me awfully curious, so now I’m going to do some research.

  • Linda @ Brooklyn Bread Jul 21, 2016, 7:37 am

    In a market like this, it is so easy to completely lose sight of the very critical and fundamental truth of what you are saying. I keep looking at all my portfolio’s gains, driven mostly from the S&P (and Intel – thanks Dad!) and it feels like it can never stop. I mean, I saw it happen in 2008, but because it’s not happening now, it seems like it never will. It’s just that trick our brain plays on us where it can’t imagine any scenario different from the one before it at the moment. Obviously you’re not going to take your retirement savings out of the market or anything, but it’s definitely healthy not to feel invincible – even with your “safe” investments. Or too sure you know what is about to happen. I think the past few months have proven that we seriously haven’t the foggiest.

  • Frugal Familia Jul 21, 2016, 8:56 am

    Dang man you’ve been killin it with the guest posts lately, congrats! Very bold prediction and I’m going to jump on the bandwagon and agree with it wholeheartedly. While I never try to time the market I do load up a little heavier during a pullback rather than into a rally.

  • Paul Andrews Jul 21, 2016, 8:02 pm

    Tricky Tricky, Mr. FinanceSuperHero; I actually thought you were going to give a buy/sell/hold recommendation! I like everything you got going on on your site, but when I read that I thought to myself, “Shit, another one joins the herd mentality and thinks they know more than they do.” Glad to see you (and Matt here at Distilled Dollar) haven’t drunk the Kool-Aid. Just like Stefan, I’ll only buy when there’s a significant sell off. Basically, if there’s a ton of red, I know it’s time to think about adding a little to my portfolio. Great article!

  • FinanceSuperhero Jul 21, 2016, 10:43 pm

    Haha, not to worry Paul, you’ll never catch me joining the herd. In fact, I think one of my best qualities is that I understand how much I don’t know. I practically have a PhD in self-deprecation. 🙂

  • Patrick Jul 26, 2016, 8:04 am

    I’m in the ‘boring’ camp myself. I keep almost everything in total market ETFs. I do have a brokerage account that I made some ‘picks’ on, years ago, and it’s still growing(as I let it sit there and rot). All my stocks there have been up, down and back again. I think the closest I’ll ever get to ‘picking’ stocks, is possibly trying to make my own dividend growth group, but even then, those are relatively set, forget, and occasionally re-evaluate. But on this boring plan, I’ve watched my net worth quadruple in under 3 years, so I can’t complain.

    • Distilled Dollar Jul 27, 2016, 8:00 am

      Wow! Quadruple in 3 years. I know the equity market had some stellar returns (up until the recent flat/volatile environment). Did you net worth quadruple solely from returns or also because of new contributions?

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