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I predict …

January 1, 2011

It’s my least favourite time of year. Prediction time. As in “I predict a relapse for Lindsay Lohan” or “I predict a wedding for Cher” or “I predict the stock market is going to rise” or “I predict the stock market is going to fall”. Really? Wow. What great insights. It must be tough predicting things that most likely have a chance of eventually happening.

I am certain if you live in a major media centre, no matter where you live in the world, in the last few days or the next few days you will wake up and find a blog, newspaper article, magazine article, tweet, TV show or a guy standing on a corner telling you exactly how markets are going to end up in 2011. That’s my prediction.

So what? So who cares? Well, I know a thing or two about personal finance as I work for a major financial services company in North America and one of the things I know is when someone says “The market is going to crash”, they are right. I also know if they said “The market is going to take off”, they are also right.  I also know when someone who sounds really smart (and they do sound really smart because they are really smart) makes a very bold prediction many people may be prone to acting on that advice. Now this is a great thing if the advice turns out right. It’s a horrible thing if the advice turns out wrong.

I mention this because every now and then I clip articles at the start  of the year that make bold predictions. It’s fun to go back and see how wrong they were. Okay, they are some times right and not always wrong. But they are often wrong and I think they are likely more wrong then they are right. So what were people saying last year? Here’s a good headline “S&P to plunge 40% next year”.  Ha, ha. That’s a great one. Guess what the S&P 500 did? Yeah, it went up. No, it did! Not down like the prediction said. Up. Like the prediction didn’t say. Up by 15.06% and that excludes the dividend return which would add another 1% to 2%.

Here’s another one. “Brace yourselves for the next wave of the bear market”. It was published on February 1, 2010 in a Canadian newspaper. Want to know when the Canadian market reached it’s low for the year? If you guessed later that week you are right! Yep. Sure enough. Just four days later, on February 5, the Canadian stock market reached its in-year low of 10,990.41. It finished the year at 13,443.22. That’s up 22.3%. The same article quoted a guy who said his conservative estimate for the market was to decline 50% to 60%. That was his conservative estimate!

So here’s the problem. These headlines are often gratuitous. They are designed to grab people’s attention. They quote people who are smart and rich. So you and I think “Wow, if these people are smart and rich, then they must really know what the heck they are talking about” and we take their advice. Well, we don’t really take their advice because if you read the articles carefully, they never really give any. But advice is inferred, isn’t it? If someone really smart and really rich says “The stock market is going to decline by 50%!” what are you going to do? Probably not invest in it! Heck, you may even short the market. If you shorted the market when it went up you lost money. If you simply stayed on the sidelines you didn’t lose money but you lost out on the recovery.

So what are the headlines saying this year? Yeah, you guessed it. Optimism is the new king. Lots and lots of headlines that are saying markets are great, it’s a good time to buy, yada, yada. Sigh. Is it? Is it really a good time to buy? After a two year recovery from one of the most calamitous market events of our time? Really?

Listen, I have no idea what markets will do but I am pretty sure of this. If you act on the headlines, you are gambling and not investing. You want to be an investor? Then be drop dead boring. That’s right. Be boring. It might not make you rich but it won’t make you poor. I’m boring. I pay myself first. It means I set aside money every month for my future before I spend the rest on today. I increase that amount every January 1. I invest in a portfolio that matches my tolerance for risk. I then ignore it. I don’t spend beyond my capacity and don’t carry excessive debt (I have some, like I said, I’m not rich). I have life and disability insurance in case something goes horribly wrong. I have some money in cash in case of emergencies, and there always are some. I can survive the loss of my job.  B-O-R-I-N-G! Yeah, I know. Boring as all can be. But I’m not broke and doubt I ever will be. I’m not a gambler. I don’t care what markets are going to do or not going to do. And I certainly don’t gather my insights from some guy’s blog. Yeah, that was meant to be sarcastically ironic.

I’ll leave you with this insight into an alleged con trick. Back in the 1980’s, when I first entered this business, I heard of a con that went something like this. Guy sends out 50,000 letters. Half say “market is going to go up this week” the other half say “the market is going to go down this week”. Market goes up. He then sends 25,000 letters out to the people who received the optimistic letter. Does the same thing. Half get a letter saying market will go down, half get a letter saying market goes up. Market goes down. Now he sends a letter to the 12,500 people who got a letter saying market was going down. Keeps doing the trick until someone starts believing he is the smartest guy in the world. They send him money. Sometimes lots of it. He skips town.

I predict someone will get caught by someone else’s prediction. I can pretty much take that one to the bank. This year, why not play it a little safer and ignore the predictions. Be boring. It doesn’t make for great cocktail party chatter but at least you should still be able to afford to go to them.

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From → Personal Finance

One Comment
  1. Will Rogers knew the key to investing is to only buy stocks that go up, and don’t buy those that don’t. Investments go up and down, but no one ever cried that took profits. So gather profits on bonds or stocks to diversify.

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