How To Predict the Stock Market Like an Expert
Political and economic events, like our recent government shutdown , tend to bring forth all sorts of wild predictions on the future direction of the stock market.
Because of the recent bull market that has lifted stock prices near all time highs, some are predicting a huge correction. They say that the market is overvalued and can’t go much higher. Some people go so far as to predict downturns within a day.
Other so called experts are predicting a meteoric rise in equities. Larry Fink, chairman and CEO of investment firm BlackRock, recently received headline exposure for his predictions that the market will hit 28,000 in 2019.
Bold statement, Larry! With prediction skills like that, I’d like to know where he bought his magic ball.
Fink has been wrong before. Most notable were his wacky predictions on the direction of interest rates in 1986 that resulted in a $100 million loss for his employer. Oops!
It’s unbelievable really. Both the fact that people make such predictions. And the fact that they receive major media coverage for spewing the nonsense.
Then of course, the media knows that fear and greed sell. Misguided individuals flock to headline stories that offer nonsense ideas and blind future predictions.
Don’t you realize? If it were so easy to predict the future direction of the market, shouldn’t more people be extremely wealthy? It should be easy to buy low, sell high, right?
Start reading a bit more on this topic and what you’ll find is that market predictions have become the norm. They’ve existed for decades and individuals never get tired of a good story, but they are nothing more than a coin flip. Wrong predictions are as common, if not more common, than those that come true.
The truth of the matter is this. The stock market, and any other investment can do one of two things:
- Go Up in Value
- Go Down in Value
Which will it be? I don’t know, and neither do you. And neither do professional mutual fund managers.
Vanguard published a great paper that examined the scientific evidence related to market timing and market predictability. I’ll summarize the results for you:
Even professionals cannot time the market. They consistently fail. Or in the words of Vanguard:
“The average professional investor has persistently demonstrated an inability to time the market. The timing patterns that are obvious in the historical data provide no help in developing future timing strategies.
The failure of market-timing strategies has not been limited to mutual funds. Investment newsletters, pension funds, investment clubs, and professional market-timers have also failed to demonstrate consistent success with market-timing strategies.”
All of the evidence suggests that short term market predictions are nearly impossible. And because of sharp movement, attempting to time the market can be disastrous for the individual investor.
By predicting a sharp correcting and withdrawing from the market, you are exposed to significant risk. While you could be correct in your prediction, you may also be wrong which would lead to missing out on a huge upswing.
What should you do when confronted with all this conflicting advice? It’s simple – Ignore it.
Instead of worrying about things you can’t control, and which cannot be reliably predicted, such as the direction of the markets, focus on those variables that you can control, such as fees and investment costs.
Pay no attention to “experts” who claim to have a predictive ability that doesn’t exist. Instead, follow the evidence that continually proves that market timing is not possible.
Invest in a globally diversified portfolio of low-fee index funds or ETFs in an asset allocation suitable for you.
Stop worrying about the market fluctuations. Stop trying to predict the stock market. You can’t do it.
In the case of investing and market timing, less is more. None is most.