Still time to rethink resolutions before you err: Guest view
During your free time over the holidays, you may have pondered your financial and business future, and resolved to do some things differently in 2018.
If so, you may have based some resolutions on expectations of what will or won’t happen during this new year, as compared to last. On a number of levels, this is probably a mistake. Planning for the unexpected — rather than having firm expectations — is a bulwark of wise financial and business planning. No one can predict the future, least of all those who assume that it will necessarily resemble the recent past. Those who are braced for the unexpected are rarely surprised.
Even though we’re several weeks into the new year, it’s not too late to retool any resolutions that could lead you into troubled territory. To accomplish this, you should consider some distinct economic, financial and business realities, including:
The risks created by recency bias. Those who have this bias unfortunately believe that an investment’s near-term future performance will simply resemble its recent past. Actually, the near-term future of an investment is more likely to resemble its long-term past average. (Statisticians call this reversion to the mean.) If a lackluster investment spikes upward, the statistical likelihood is that this probably won’t continue. Often, what’s “hot” abruptly declines.
Business owners can also fall victim to recency bias — by assuming that economic conditions that benefit them will necessarily continue (even though economists characteristically can’t agree among themselves on such matters). Sure, it’s good to make business investments that capitalize on current, favorable economic conditions. But if your projections aren’t tinged with a bit of skepticism and accompanying conservatism, you could be setting yourself up for damage. After all, it isn’t whether there will be another recession, but when.
Historical evidence demonstrates that stock market and economic performance aren’t always connected. Remember the words of Nobel laureate economist Paul Samuelson: “The stock market has predicted nine out of the last five recessions.” This was Samuelson’s way of noting, with an economist’s illogical humor, that good stock markets and poor economies can co-exist — as they did during the Great Recession, which persisted into 2012 during a bull market. There have also been poor stock markets during robust global economies.
It’s impossible to predict the stock market because it’s truly random. Thus, investors who attempt this are like pedestrians walking aimlessly, without direction. This principle is aptly demonstrated by Burton Malkiel, the renowned Princeton economist, in his classic book, “A Random Walk Down Wall Street.” Based on this, it’s foolish to speculate on performance by buying and selling stocks, which is dangerous. Instead, a better course is to invest in passively managed vehicles, such as low-cost index funds, as dictated by your individual goals and financial plan. A diversified portfolio of such funds can help you reap the overall returns of the market, which historically is up more than it’s down.
Among unknowns are events that currently seem to make no sense. For example, a couple weeks before the 2016 election, Hillary Clinton was leading Donald Trump in the polls so substantially in key states that a Trump presidency seemed extremely unlikely. However, as a result of the election’s surprise outcome, we now have a tax cut that most people never saw coming.
One of the best investments you can make for your portfolio and your business is to spend less and save more. Unlike market or economic events, this is something you can control. It just takes discipline.
By keeping these points in mind, you stand a better chance of making wise financial moves — both at work and at home. Though you may have already made some New Year’s resolutions, it’s not too late to change them.
Tim Decker is president of ISI Financial Group, a wealth management firm in Lancaster, and a fee-only financial planner. His weekly call-in radio show, “Financial Freedom,” airs Saturdays at 10 a.m. on WHP 580 AM.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it is not intended to provide specific financial advice. Investing involves risk, including the loss of principal. Past performance is no guarantee of future performance. You should always seek professional guidance before making any financial or legal decisions, as everyone’s needs are different.