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The beginning of each year brings with it a swarm of market forecasts, each offering some glimpse of what the forecasters believe will happen in the months ahead. Before you make decisions based on these forecasts, it’s important to remember that no one is consistently good at predicting the future.
It’s also crucial to understand that the primary reason investors love forecasts is because everyone craves certainty.
Author Jonathan DeYoe writes in his new book Mindful Investing, “The brain gives us a false sense that we are moving from certainty to certainty. That’s not what we’re doing. We’re moving from uncertainty to uncertainty.”
Within the investing world, there are usually a wide range of predictions at the start of the year. You can easily grab hold of a market forecast that aligns with your own perspective. That’s the real problem. Your mental blind spots filter out the forecasts that don’t match what you believe.
Think about the meaningful events that impacted markets over the past few years. In January 2020, do you recall any forecasts mentioning COVID? In January 2023, do you remember any predictions about the Israel-Hamas conflict?
Market forecasts as a whole are both perilous and unimpressive. I saw a study recently that examined stock market predictions over the past six years. The estimation error range was substantial, with some far too low and others too high. On average, the consensus S&P 500 estimates missed the mark by double digit percentages in most years. Hardly a ringing endorsement.
If the search for certainty is misplaced, what’s the alternative? Perhaps an embrace of uncertainty can prove more fruitful in the long-run.
Once you stop relying on forecasts and predictions, a whole range of new possibilities opens up. If you stop chasing certainty, you start becoming comfortable being uncomfortable.
Uncertainty is part of everything you do. If you had known in January 2020 that the world was about to go through a pandemic, what would you have thought about your investments? Very likely, you would have been terrified and indeed the markets reflected that fear for a few months during 2020. However, for calendar year 2020 as a whole, the S&P 500 posted a 17.4% return, well above its historic average. Uncertainty created opportunities for investors who stayed focused on their long-run goals.
Perhaps you crave certainty because you’re trying to avoid market downturns. While that’s understandable, as 2020 taught us, accepting some uncertainty is fruitful since risk and return are related.
One of the most beneficial and practical strategies that you can consider is building a degree of flexibility into your financial plan. Flexibility can help reduce the impact of uncertainty on your financial life and makes you more resilient.
Related: Will Your New Years’ Resolutions Make You Healthier, Wealthier, or Happier?