Kyle Bass became instantly finance famous when he called the sub-prime mortgage crisis and made a handsome profit for the clients of Hayman Capital Management L.P. It would be wonderful if a manager could consistently call every large movement in the market, but perfect predictions of major events are so rare that they can propel the predictor to overnight fame.

2014 has been as difficult a year for predictions as any. Despite the media provoking Canadians to worry about rising interest rates, the iShares DEX Universe Bond Index Fund (representing the total Canadian bond market) is up 8.24% year to date. Conversely, the DFA Canadian Core Equity fund (representing the total Canadian equity market) has returned -2.40% over the same period; investors bailing out of bonds early in the year in fear of rising rates have passed up a large opportunity. The challenge of making accurate market predictions was also demonstrated when the price of oil embarked on a sharp decline. There was no way to anticipate the events and decisions that led to the price of oil dropping, and there is no way to predict what will happen to the price of oil in the coming weeks and months. The performance of bonds, stocks, resources, sectors, and geographies are interdependent and governed by so many variables that even a perfect financial model (if it were to exist) is subject to massive variances based on its underlying assumptions. As inconsistent as market predictions are, the financial media and the institution of active management thrive on the human desire to be on top of the next big call.

Rather than wrestling with CNBC’s latest tip, smart investors stay disciplined and maintain their portfolio based on a well-designed framework. Discipline starts with the thoughtful and involved creation of an Investment Policy Statement. This written document becomes the foundation for all future investment decisions; it is a long-term strategy that provides rules-based guidance when short term market movement causes psychological stress. The practical maintenance of an Investment Policy Statement is carried out through rebalancing. Rebalancing is a simple concept that rewards the long-term investor, though it can be a psychologically challenging process. It involves buying assets that have gone down in price, and selling assets that are performing well – something that can seem counterintuitive when the media, and most investors, are obsessed with catching the next hot thing.

Whether or not there is an advisor involved, the investor that builds an Investment Policy Statement and rebalances to their target allocations will see volatile markets as opportunities to increase their expected returns rather than scary and unexpected times that might warrant going to cash. Important investment decisions should be based on rules, not on the next big call.