Planning - not prediction - key to markets
What will share markets return in the next 6 months? What about 12 months? They’ve been largely going up for some years now. Can that continue?
Personally, I don’t know. Does anyone, really? There are some risks. But there often are. And markets carry on upward anyway. And conversely there can be something unexpected that triggers them to fall. Followed by the task of predicting how deep the fall will be and how long it will last. And then the steps forward and back with no clear direction as markets seek to recover. But, over the longer term the market advances. Research suggests that simply taking a longer-term view, being well diversified and staying invested is more profitable that trying to time one’s way in and out of markets.
Some people believe that the future of investment markets can be seen with accuracy. Perhaps they just want to believe. Or they get paid to believe. But in reality, consistent, accurate prediction is impossible. The world is just too complex. Consider the billions of people alive today and multiply by the number of interactions they have every day and week that collectively create the world we live in. Consider also the unpredictability of human behaviour. How likely is it that the outcome of all those human interactions can be consistently predicted? The old joke that God created economists to make weather forecasters look good highlights the difficulty of accurately forecasting the future.
Predictions will continue to be made of course. Trends (which are easier to spot) to be divined. Some will be right and some wrong. Of those that are right the timing may or may not be correct. Probability alone suggests that some forecasts will be accurate. That is not a measure of skill though.
Hindsight will tell us which predictions were correct. It will seem obvious what our choices should have been. The best investors don’t expect to get every decision right though. They expect the world to do unexpected things – they build that into their mind set and their planning. They will likely have some level of diversification for instance.
And they have the right timetable in mind. 6 or 12 months can be very short term in investment markets. But take a longer term view (5 to 10 years plus) and be disciplined and more often than not you will be rewarded. And if it wasn’t highly likely over longer periods that investing in the economy would outperform leaving our money in the bank – that’s not a good outcome for any of us, investor or not.
Success therefore is not so much about predicting the future but planning for likely outcomes. And to be flexible and to recognise that occasional failure on the journey will be an outcome. The problem arises when those reversals, which could be as simple as a period of underperformance against the bank, cause us to act irrationally.
Diversify, have the right timetable in mind and longer term share market investments will likely be your friend.
Personally, I don’t know. Does anyone, really? There are some risks. But there often are. And markets carry on upward anyway. And conversely there can be something unexpected that triggers them to fall. Followed by the task of predicting how deep the fall will be and how long it will last. And then the steps forward and back with no clear direction as markets seek to recover. But, over the longer term the market advances. Research suggests that simply taking a longer-term view, being well diversified and staying invested is more profitable that trying to time one’s way in and out of markets.
Some people believe that the future of investment markets can be seen with accuracy. Perhaps they just want to believe. Or they get paid to believe. But in reality, consistent, accurate prediction is impossible. The world is just too complex. Consider the billions of people alive today and multiply by the number of interactions they have every day and week that collectively create the world we live in. Consider also the unpredictability of human behaviour. How likely is it that the outcome of all those human interactions can be consistently predicted? The old joke that God created economists to make weather forecasters look good highlights the difficulty of accurately forecasting the future.
Predictions will continue to be made of course. Trends (which are easier to spot) to be divined. Some will be right and some wrong. Of those that are right the timing may or may not be correct. Probability alone suggests that some forecasts will be accurate. That is not a measure of skill though.
Hindsight will tell us which predictions were correct. It will seem obvious what our choices should have been. The best investors don’t expect to get every decision right though. They expect the world to do unexpected things – they build that into their mind set and their planning. They will likely have some level of diversification for instance.
And they have the right timetable in mind. 6 or 12 months can be very short term in investment markets. But take a longer term view (5 to 10 years plus) and be disciplined and more often than not you will be rewarded. And if it wasn’t highly likely over longer periods that investing in the economy would outperform leaving our money in the bank – that’s not a good outcome for any of us, investor or not.
Success therefore is not so much about predicting the future but planning for likely outcomes. And to be flexible and to recognise that occasional failure on the journey will be an outcome. The problem arises when those reversals, which could be as simple as a period of underperformance against the bank, cause us to act irrationally.
Diversify, have the right timetable in mind and longer term share market investments will likely be your friend.
***
Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.
First published in the Timaru Courier on 12 September 2019, as 'Plans, not prediction, key to markets.'
