Predicting the Future May Be Dangerous to Your Financial Health
The Best way to Predict the Future is to Invent it Yourself!
- The Jetsons
Do you remember watching the cartoon classic “The JETSONS”?
Who could forget that catchy theme song? “Meet George Jetson . . . His boy Elroy . . . daughter Judy . . . . Jane his wife.” ( http://bit.ly/1IBR6fN)
It seems that “The Jetsons” wasn’t so far-fetched after all… A number of the advanced technologies forecasted by the show (produced by Hanna-Barbera and running from 1962-63) have become part of our modern life.
Here are just a few examples:
- Video Phone –just about every episode included a conversation between George Jetson and his wife or his daughter or – more ominously, his boss – using a big screen video phone. That technology has certainly come true with Apple’s Facetime feature, Microsoft’s Skype, or the now commonplace Zoom call. You can pretty much see anybody, anywhere, anytime through the click of a button.
- Motorized Walkways – the Jetsons lived in the era of big leisure, where housework was handled by a robot, and your job was a pressing a single button. You didn’t even have to stretch your legs to get from point A to point B thanks to motorized walkways! Now they’re not exactly commonplace on city streets, but nearly every major airport on the planet uses this technology to help you get to your flight faster.
- Tiny Flying Devices –at the opening of every episode, young Elroy was picked up by a small flying device to be dropped off at school. Even though we haven’t mirrored that technology, the use of affordable, efficient flying drones has exploded – with uses ranging from photography to transporting goods.
- Flying Cars –okay, they’re not commonplace. Yet. According to the Robb Report, Japan’s SkyDrive SD-XX is expected to become a mainstream mode of transportation by 2030. With funding from Toyota, Fujitsu, Panasonic, and other high-tech firms, a test flight of a full-sized prototype is already getting off the ground.
- Do It All On Your Watch-With the recent launch of the Apple watch, what is it that we can’t do on our watches today? In fact, the technology that exists today far supersedes what the Jetson’s had in mind. They never even pondered the idea of e-mail, web surfing, or Facebooking, let along watching TV.
- Electronic Newspapers-Who needs to read the physical newspaper anymore? Just like George, we now read our favorite newspapers and magazines online.
Some Investors Don’t Fully Appreciate the Risks Associated with Trying to Predict the Future
Unlike the 1960’s Jetson’s cartoon, an investor has a lot on the line when he/she tries to make investment decisions based on predicting the future.
I recently met with an elderly client who was had an entire portfolio invested in just 4 stocks. These 4 stocks were certainly from wonderfully successful US mega-companies. These four stocks had certainly performed extremally well over the last few years. Furthermore, these 4 stocks were all from the exact same asset class.
Because these four stocks have performed so well during the last few years, it is very difficult to try and explain the significant risk in the portfolio. A portfolio with only 4 US Large stocks lacks true diversification and cannot be re-balanced, and is subject to significant market risks due to geo-political and economic tensions.
This particular client felt that confident that he/she knew what the market was going to do over the next few months. He/she felt that he/she would know when the market has hit a high and would wait to diversify until then. I think this is a very risky wat to try and predict the future. If we have another episode like in 2008, this portfolio will be down approximately 40%.
Trying to predict the future of the market is very dangerous to your financial health and future.
Market Timing and Gambling
Stock ownership can be tremendously financially rewarding when approached from a non-gambling mindset.
Why, then, do so many people approach investing like gambling. Researchers have demonstrated that the “Neurological similarities between traders and gamblers are striking. Whether they are about to make a trade or plunking down a bet,” said Maggie Baker, a clinical psychologist interviewed by the Wall Street Journal, “the pleasure center in the brain lights up.”
So, it feels good to bet, but it can feel just as good to invest. The trick is making sure that you or your fund manager are actually investing smart, and not just using the market as a surrogate sports gambling book.
Numerous academic studies have identified three indications that you may be doing more gambling than investing with your portfolio.
- Stock Picking – Trying to figure out which companies in a market segment will outperform their peers.
- Market Timing – Trying to change your investments based on gut feelings or where you think things are headed.
- Track Record Investing – Hanging your future on a fund or investment manager’s past performance versus the area of the market that they follow, is unwise. Studies reveal that investing based on how well someone has done in the past almost always leads to lower returns and greater risk.
- Market Timing—A belief that you know the direction that the market is moving and you can use this knowledge to make investment and trade decisions.
How do you find out if the fund manager of an account you have is participating in these speculative activities? One way is to look at fund turnover rates. The average mutual fund turns over about 50% of the portfolio each year. That is far too often. The amount that is appropriate depends on the area of the market being captured (which is beyond the scope of this blog).
Another thing to watch for is fund changes. Advisors or investors who often change funds are making a tacit admission that they made a mistake when they bought the fund being replaced.
In my experience is it almost ALWAYS because they chased a hot manager that went cold or a trendy asset class. The professional community is, far too often, taught to sell based on ratings services. Unfortunately, that is like choosing lottery numbers based on last week’s winning numbers.
Investors get the same high that gamblers do when they make changes in their portfolios due to the news of the day. They are often under the delusion that they are protecting themselves or taking advantage of economic events before they impact the stock markets. There are changes that should take place in an investment mix, but they are gradual and should NEVER be due to anything other than time horizon and issues directly related to your financial circumstances
The great news is that you do not need to speculate or gamble to create a future of your dreams. The best way to predict the future is to create it yourself.
So why not invent the very best retirement future you could possibly imagine? We are here to help you do just using prudent evidenced-based investment strategies—not by speculating and gambling.