Do you really think it’s that easy to predict financial future? - opinion

It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
"Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible. You can make predictions, and a year later people won’t remember them.” Daniel Kahneman
Everyone knows which way the stock market will move, correct? Both pre- and post-election I have been getting a ton of emails and calls about what is going to happen to the stock market. In my column last week, I discussed how divided government has historically been a good recipe for markets. Nonetheless clients keep citing articles on how the stock market is about to crash. After all, the market has risen for more than 10 years in a row so it must be time for a crash. Of course they forget the crash that happened eight months ago when the market lost a full 1/3 of its value, as well as numerous 10% drops over the last decade.
We all hear stories how so and so knew the market was about to crash and sold off his/her entire portfolio, or another who knew exactly when the market had reached its low and invested everything he/she had and became a multi millionaire. Sounds easy, right? Wrong! If it was so easy to predict a crash, why have the doomsayers been consistently wrong in their predictions? They have been predicting a crash for a decade with nothing to show for it. When it finally does crash, they insist that it will keep dropping and dropping and I guess, think it will go to zero. Not understanding that there is still a global economy out there.
Do you really think it’s easy to predict the future? Look no further than the latest five-day weather forecast to see how difficult it is. Our trusted weatherman with the most sophisticated scientific instruments at their disposal can’t tell us what the weather will be in two days from now.
Investors should draw on experience, history, and learn from it and try and create a plan based on current similarities. Use history as a guide and plan accordingly. With a little perspective you can avoid mistakes many investors make in both rising and falling markets.
Investors often think that nothing needs to be done to their portfolios when markets are rising and their portfolio value is rising as well. Unfortunately, even in rising markets mistakes can be made. It’s important to remember that markets don’t always move up, and that they can drop as well. For younger investors, market gyrations are less problematic. For retirees or those fast approaching retirement, the need to preserve your capital becomes much more important. Chances are that once you hit retirement what you managed to save is what you will have to live off of (in addition to pension monies and social security), and having a portfolio that is overly aggressive can blow up in your face if the market gets slammed.
Don’t forget about your asset allocation. The recent market surge has been driven by certain segments of the market such as tech stocks. Make sure that your portfolio stays in balance. For example if you had 5% exposure to technology and now after the run-up you have 15% exposure, you may need to pare back on your holding.
When the market is strong, some investors lose sight of their long-term goals and focus just on how much they’re making in the short run. But if you start focusing on the short term, you might take on more risk than you should.
Be patient. It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.; [email protected]