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You probably check your weather app or look at the weather forecast on TV every day. Weather apps are extremely popular with The Weather Channel alone claiming 50 million regular users.
Perhaps you also look at financial forecasts each day replete with confident prognostications about inflation, interest rates, and the direction of the markets.
If you make outdoor plans or investment decisions based on forecasts, you’re likely to be disappointed. The accuracy of a 10-day weather forecast is less than 50% and most market forecasts are even less reliable. A coin toss gives you better odds.
Yet forecasts abound.
Meteorology is a branch of science that studies the atmosphere. Weather forecasts generally have some scientific basis. By contrast, most of the financial forecasts you see aren’t forecasts at all. They're just wishful opinions.
HOW EVIDENCE-BASED SCIENCE LEADS THE WAY
How you make investment decisions shouldn’t be based on someone’s opinion or hunch. Instead, you should purposefully make financial decisions using evidence-based science overlaid with your particular long-term goals.
That’s right. You don’t need faulty forecasts at all. Financial market science will guide you if you in the right direction. Nearly 100 years of data provide ample evidence that you don’t need forecasts for good investing outcomes.
Forecasts fail because the world is constantly changing. Human innovation and ingenuity have fueled progress in the past and that will continue in the future. Markets have proven their resilience time and time again. That’s why optimism is the only realism.
Yes, the broad economy is currently filled with challenges, but these obstacles have been met many times before. Your financial choices shouldn’t dwell too much on today, but instead, look to the future. The main purpose you are saving and investing for is probably many years from now.
WHY CHANGING YOUR APPROACH IS A PROCESS
You don’t have to look further than the past couple of years to see how the stock market met the challenge. During 2020 and 2021 the S&P 500 rose 18.4% and 28.7% respectively. With the backdrop of the pandemic, no market forecast would have predicted those results.
So, if you’re currently all into forecasts, how do you change? Unfortunately, changing the way you approach financial decisions is a process of becoming more aware of what your decisions mean both now and in the future. This won't happen overnight.
Financial decision-making, sans forecasts, often leads you away from reams of data and optimized thinking. Instead, making high-quality financial decisions depends upon your separating financial needs from emotional wants. Algorithms and artificial intelligence can’t do that, but human intelligence can.
Maybe looking at the weather forecast to help plan your outside weekend activities is okay, but using market forecasts as a basis for your investment decisions isn’t. Forecasts can lead you to make decisions that are contrary to your best interests. Remember, your financial future shouldn’t rest on a pundits wishful opinion of what they think might happen next. Your opinion matters most. Start there.
Related: Do You Have Good Investing Skills?