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Nobody Can See the Future

Published on January 13, 2022
It’s that time again where everyone is offering their views on the upcoming year, with market commentary and outlooks. Last year’s results, data and opinion are assembled into a narrative along with forecasts and implied recommendations. Investors seeking to reduce uncertainty and anxiety are easily attracted to such prognostications.

It’s hard to know what to make of them all. If history is any guide, these well-crafted stories rarely pan out and provide little useful or actionable information. For long-term investors, stepping back with a longer-term perspective can help to avoid costly mistakes.

DEVINING VISIONS THROUGH THE MISTS OF TIME

The data would suggest that the most likely outcome in any given year is a stock market gain of 12%, which is the average annual return.1 The data also reveals the fact that 75% of the years are positive in the stock market. Long-term investment decisions should be based on these probabilities, rather than the wide range of diverging opinions and largely speculative narratives. Of course, the actual outcome in any given year can vary widely, but the longer you stay invested and the more draws you take from the distribution, the more likely you are to get the long-term average.

For most investors, there is little need to try to predict the near-term future based on the constant flow of information and opinion regarding recent events and the current investing landscape. Successful investors have a long-term perspective and dedicate a portion of their assets to growth and invest based on long-term probabilities. When this perspective is taken, the largely random and unpredictable stream of yearly events, headlines and subsequent results lose their significance. While the market will surely go up and down, often the best course of action is to stay invested and stick to your plan.

From the Behavioral Viewpoint


What is Going On?

  1. Calendar years, annual statements, and tax filing drive investors to anchor on recent events and returns. The media floods investors with an overload of new year information and opinion that stimulates our emotional need to act.

  2. We use patterns, stories, and shortcuts to help understand what is going on around us, even if it means making up stories and adopting plausible theories. This Narrative Fallacy creates a natural overemphasis on story over data that often results in faulty analysis and poor investment decisions.

  3. We are easily Fooled by Randomness and have a hard time accepting randomness. We want to believe that there must be some way to forecast and navigate largely unpredictable markets.

What can we do?

  1. Reframe your investment time horizon and learn to understand markets as a long-term return distribution. The more draws from the distribution, the better the outcome. Develop realistic expectations and accept that both positive and negative returns will inevitably occur. Give resources allocated to growth the time necessary to mature and achieve expected long-term results.

  2. Develop a needs-based plan that separates short-term and long-term investments and stay fully invested over time. Build a strategy-diverse equity portfolio that can be resilient in a variety of market conditions and is designed for the long-run.

  3. Work with an experienced financial advisor, who has been through different market environments. They can provide perspective and coaching to help stay on track and remain focused on long-term goals.


Get Behavioral Investing Insights

Behavioral Viewpoints feature new topics each month which are intended to help advisors and investors gain a deeper understanding of how behavior shapes the investing landscape.

IMPORTANT INFORMATION AND DISCLOSURES

  1. Source: Fama-French Market Return Series, June 1, 1926 – December 31, 2021

The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product.  There can be no assurance that future recommendations will achieve comparable results.  The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.  AthenaInvest disclaims any responsibility to update such views.  These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest representative.

You are solely responsible for determining whether any investment, investment strategy, security, or related transaction is appropriate for you based on your personal investment objectives and financial circumstances.  You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation.  Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

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