Can you Predict the Future?
As originally appeared in The Jerusalem Post, November 19th, 2020
Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible. You can make predictions, and a year later people won’t remember them. Daniel Kahneman
Everyone knows which way the stock market will move, correct? Both pre and post- election I have been getting a ton of emails and calls about what is going to happen to the stock market. In my column last week, I discussed how a divided government has historically been a good recipe for markets. Nonetheless, clients keep citing articles on how the stock market is about to crash. After all, the market has risen for more than 10 years in a row so it MUST be time for a crash. Of course, they forget the crash that happened 8 months ago when the market lost a full 1/3 of its value, as well as numerous 10% drops over the last decade.
We all hear stories about how “so-and-so” knew that the market was about to crash and sold off her entire portfolio, or another who knew exactly when the market had reached its low and invested everything she had and became a multi-millionaire. Sounds easy, right? Wrong! If it was so easy to predict a market crash, why have the doomsayers been consistently wrong in their crash predictions? They have been predicting a crash for a decade with nothing to show for it. When it finally does crash, they insist that it will keep dropping and dropping and I guess, think it will go to zero. Not understanding that there is still a global economy out there.
Do you really think it’s easy to predict the future? Look no further than the latest 5-day weather forecast to see how difficult it is. Our trusted weatherman with the most sophisticated scientific instruments at their disposal can’t tell us what the weather will be two days from now. This usually leads me into a rant about global warming but I’ll leave it to economist Thomas Sowell who said, “Would you bet your paycheck on a weather forecast for tomorrow? If not, then why should this country bet billions on global warming predictions that have even less foundation?” But I digress.
Investors should draw on past experience, history, and learn from that to try and create a plan based on current similarities. Use history as a guide and plan accordingly. With a little perspective, you can avoid mistakes many investors make in both rising and falling markets.
It will never fall
Investors often think that nothing needs to be done to their portfolios when markets are rising and their portfolio value is rising as well. Unfortunately, even in rising markets mistakes can be made. It’s important to remember that markets don’t always move up and that they can drop as well. For younger investors, market gyrations are less problematic. For retirees or those fast approaching retirement, the need to preserve your capital becomes much more important. Chances are that once you hit retirement what you managed to save is what you will have to live off of ( in addition to pension monies and Bituach Leumi/ Social Security), and having a portfolio that is overly aggressive can blow up in your face if the market gets slammed.
Don’t forget about your asset allocation. The recent market surge has been driven by certain segments of the market such as tech stocks. Make sure that your portfolio stays in balance. For example if you had 5% exposure to technology and now after the run-up, you have 15% exposure, you may need to pare back on your holdings.
When the market is strong, some investors lose sight of their long-term goals and focus just on how much they’re making in the short run. But if you start focusing on the short term, you might take on more risk than you should.
Be patient. It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.
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The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
