Behavioral Finance

Ed. This is an “oldie but goodie” article that I wrote back in 2015. It seemed really relevant at the current market juncture, which many feel is filled with uncertainty. I think it’s important to remember that our ‘tactical’ methods of investment management are designed to take into account all manner of uncertainty with a specific game plan in mind… at all times. ~Jeff

Should we have an opinion about the stock market, or even about the direction of the economy? Is it important to set a firm course of action based upon our expectations of what we think will occur in the coming months?

Most readers when asked, would think these questions a bit silly. Everyone “knows” that you must have an opinion to be a successful investor.

Or do you? Given the nature of how  a publicly traded market truly functions, it’s quite possible that having a preconceived notion about it’s future direction could be more hindrance than help.

I consistently see evidence that the investors who have a firm opinion about what they believe will occur in the future are taking a risk with their flexibility. They’re messing with an essential investing skill that is the ability to change and adapt to a very fluid and dynamic situation.

Once a money manager or other professional makes a public declaration about an expected market direction, it becomes increasingly difficult for them to abandon their position should the market begin to prove them wrong. Ultimately, this can lead to their own pride or hubris costing them and those they advise significant sums of money.

Even the “experts” are wrong most of the time. In a classic case of “couldn’t be MORE wrong”, late in the year in 2007, in an annual Barron’s survey, 12 prominent strategists were questioned about what they thought would be the course of the economy and the market for 2008.

First, not a single one of them predicted a recession even though we were already in a recession at the time of the survey (December 2007). Second, their ending estimates for the S&P 500 were between 1525 and 1750. The S&P 500 closed 2008 at 903.25. That’s an embarrassingly huge miss!

Of course, it would be a bigger shame if they managed or advised others based upon an unflinching adherence to their predictions. That’s a portfolio-wrecking miscalculation and strategy. And this isn’t just one “strategist”… it’s all of them.

It’s foolish, dangerous and most likely quite expensive to try to predict the stock market in any economic scenario. Of course, this doesn’t stop the pundits or the headline-seekers from attempting it. They must be doing it for the pure publicity… good or bad, it doesn’t seem to matter.

But for me, this is why it doesn’t matter what I think about the future. The good news is that when I’m stacked up against some of the greatest economists in the world, I figure I’ve got about the same odds as them as being right. The bad news is that those odds are somewhere between slim and none.

What to do?

I think that it is more important to imagine a number of potential scenarios and their corresponding courses of action. From this brainstorming session, you can develop a written plan for the future of your investments in a sequence of decision statements.

I’ve tried to do this with our investment portfolios. We have “rules” that we follow that indicate to us when to be in a market and when to be out of a market. We don’t guarantee results or performance, but we place an emphasis on putting in place the decision trees to try to avoid the large long-term losses that come along a few times during an investor’s life cycle that can wreck or alter a financial plan entirely.

Once these rules are in place, then truly does not matter what I, you or anyone else thinks about the market. If it’s good, we’re in. If not, we’re not. Very low stress.