Planning vs. Predicting: Market Thoughts

I am certainly not going to predict what general business or the stock market are going to do in the next year or two since I don’t have the faintest idea”. 

-Warren Buffet 

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”. 

-Mark Twain 

“It’s tough to make predictions, especially about the future”. 

-Yogi Berra 

After a sustained period of above-average equity market returns, stocks have struggled so far in 2022 as markets weigh multiple uncertainties including inflation, looming interest rate increases, Omicron impacts, and growing tensions between Russia and Ukraine. Times like these can be understandably unnerving. As we often say at Morris Financial, however, we must remember that the “downs” are an unavoidable part of investing. A thoughtful financial plan accounts for and is resilient to, these market downturns. 

With increased volatility, often accompanied by television pundits warning us to run for the hills, some of our clients naturally have questions: Should we still be confident in our investment plan? Should we go more conservative and wait this out? Should we be in the market at all right now? Money loss, even if only on paper, can activate the core fear center in the amygdala in the human brain. We have evolved to be afraid of losing food or other valuable possessions, and market downturns can activate these same fear centers in our brains. It is natural to look for reassurances. 

But trying to anticipate, predict, or react to short-term moves in the market is more akin to gambling strategy than investment strategy, and gambling rarely works out well in the end. The market absorbs and reacts to daily information, and uncertainty is an inherent part of that process. Markets go up and down, and history proves it impossible to consistently time these moves in advance. 

Since questions like “Should I be in the market right now?” are really just alternate forms of “What is the market going to do this year?”, it is interesting to consider the historical accuracy of the “expert stock market predictions” that populate the January airwaves, print media, internet, and Wall Street. A December 2020 article by New York Times reporter Jeff Sommer compiled the data, and the scorecard was not good. 

At year-end 2019, the median forecast on Wall Street was predicting a 2.7% rise in the S&P 500 in 2020. This prediction missed the actual return (+18.4%) by almost 16 percentage points. Worse yet, in April after the pandemic had taken hold, the consensus forecast was revised downward to -11% (almost 30 percentage points below the eventual outcome!). Much the same story can be seen in large U.S. investment banks’ predictions for the S&P 500 in 2021. Goldman Sachs, Barclays, Morgan Stanley, et. al. missed the annual return by an average of almost 15 percentage points. 

What about the long history of predictions in more “normal” years? Looking at data from 2000 through 2020, the median Wall Street forecast missed its target by 12.9 percentage points on average. The bottom line is this: even though many people make their living as professional market forecasters, data shows that the median forecast is of no value. History has shown there’s no compelling or dependable way to forecast stock and bond movements. 

The truth is that we humans are pretty lousy at predicting the future. Still, some of us keep expecting to be able to. Author Daniel Kahneman observed in his book, Thinking, Fast and Slow, “The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.” Loud voices will be heard, and bold predictions will find airtime because that’s how things work in media. 

It is important to remember that nobody knows the future with certainty. As Kahneman continues, “The world is incomprehensible. It’s not the fault of the pundits. It’s the fault of the world…it’s just too complicated, and luck plays an enormously important role”. 

So what do we do? We accept uncertainty. Bad times and tough-to-stomach losses can and will happen. We must accept that we can’t know when. We accept that this is part of investing. 

More importantly, we trust. We trust in the long-term prospects for a global economy driven by thousands of diverse companies representing millions of hardworking people coming together and finding creative ways to push ahead. We trust in growth driven by the collective power of human ingenuity. We trust in the tireless and comprehensive financial planning we do on behalf of our clients and in the resilience of each client’s plan.

When we know your financial plan accounts for the ups and downs, we don’t have to guess. We believe a successful investing experience comes not from haphazard market predictions, but from careful financial planning and allocating assets based on needs, wants, and acceptable levels of risk. Further, holding a range of investments broadly diversified by asset class, focusing on systematic drivers of returns, and trusting in the long-term power of the markets. 

We know that market losses can be scary. Let us carry that burden for you. As always, our financial advisors are here to answer questions, address concerns, or just to chat. Morris Financial Concepts is a financial planning firm in Mount Pleasant SC that works for you daily. 

The opinions expressed herein are those of Bart Valley at Morris Financial Concepts, Inc.  (“MFC”) and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. Some information contained herein is derived from third-party materials MFC believes to be reliable, however, its accuracy and completeness cannot be guaranteed. Nothing contained herein is an offer or recommendation to buy or sell a particular security or investment product. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2 and Form CRS,  which are available upon request.