More than 25 years ago, pop star Jewel was nominated for Best Female Pop Vocal performance in singing her song “Foolish Games”. Over 500 years ago, an early proverb in the English language became known; “A Fool and his money are soon parted.”
The major stock market indexes are at or near all-time highs leading some to suggest the market is due for a correction. You have heard me say or read that I do not believe anyone can predict the future. Attempting to “time the market” is a fool’s game. This, my friends, is a sure bet; There will always be fools and there will always be attempts to predict the future!
Fools may get lucky or unlucky but it will be disconnected from decisions executives make in running their companies. Investing in the stock market is an investment in companies. There are times when a company improves their bottom line even though the economy is poor. A company’s bottom line is a driver of the stock price.
Attempting to time the market starts a difficult emotional roller coaster for the investor. Let’s consider a couple scenarios.
1) You predict the market will go down, so you get out. However, your prediction was wrong, and the market goes up. Well now you are likely even more convinced the market will go down plus you don’t want to admit you were wrong so you stay on the sidelines. Some people may have believed there was going to be a “double dip” after the bear market in 2008-2009. The next 5 years represented huge market gains missed by some who predicted incorrectly.
2) You predict the market will go down, so you get out. The market does go down! Now “confirmation bias” kicks in and you start believing you actually can see the future. Well in order to succeed in the future-predicting business, you have to be correct twice! So you got out and were lucky avoiding losses, but you haven’t made any money until you predict when to buy back in to the market and are lucky enough to make your second straight correct prediction!
The stress of even attempting predict the ups and downs of the stock market can be debilitating as people become addicted to their smartphone, TV personalities and the “can’t miss” tips from their buddies. Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. Sophisticated, well-educated, do-it-yourself investors are particularly affected by confirmation bias. They don’t hold themselves accountable as their lucky predictions stick in their memory longer than their unlucky misses.
Working with a fiduciary; an independent partner, may provide perspective and wisdom. Information isn’t knowledge and knowledge isn’t wisdom.
You don’t know what you don’t know. You may recognize you don’t know everything or more than a topfiduciary professional. Nobody considers themselves a fool. It also feels good if we give ourselves an “A” as our own advisor! Our focus at PCA is successful outcomes without crystal balls or regard for who gets the credit.