By this point in January, it’s a safe bet that many New Year’s resolutions have already been broken. Change is never easy and using the dawn of a new year, or a new decade, as motivation doesn’t seem to help much. Temptation derails us in so many subtle ways!
At this time of year, financial temptation comes in the form of the many predictions we see in the media about what’s going to unfold in the markets in the coming year. Fund managers, analysts and market gurus explain in detail the factors that are going to drive the market higher or lower over the next 12 months.
Sadly, their crystal balls are just as foggy as yours and mine. The evidence is incontrovertible that no one can accurately predict what’s going to happen in the markets.
The past year is an excellent example of how wrong the forecasters can be. At the beginning of 2019, they were in a downbeat mood about the stock market’s prospects. Coming off a poor month of December 2018, they were fretting about rising interest rates and an economic slowdown that would pinch the stock market.
In fact, interest rates fell, and the markets soared with the TSX composite enjoying its best year since 2009 with a return of 22.9% while the S&P 500 was up 31.5%. If you had listened to the forecasters and pulled money out of the market, you would have missed out on those returns.
Indeed, trying to jump in and out of the market in an effort to avoid dips and catch rallies has been shown to be one of the worst wealth-destroying moves you can make. Yet, the temptation to try to outsmart the market is enormous, especially when you are being bombarded with predictions from gurus.
To help you avoid being taken in by them, a blogger who specialized in behavioural investing psychology recommends you make a list of your own predictions for 2020 and then check back at the end of the year “to get a cold dose of reality” about our own inability to forecast the future.
That seems like a good exercise, but it shouldn’t be that hard to do the right thing. As always, your best strategy is to systematically rebalance your portfolio back to target, based on your investment policy, be patient and stay invested through the ups and downs in the market.
At PWL, we use low-cost index funds to ensure clients are broadly diversified and reaping all the returns the markets are offering. When it comes to your savings, your best bet is to make a resolution to tune out the market gurus and stick to this scientifically proven way of building wealth during this and every year.
With that, I wish you a very happy and prosperous 2020.