As investors wait for the ball drop on New Year’s Eve, Financial prognosticators are busy manufacturing predictions with their crystal balls. These predictions range from giving Americans what they want – solid, action-worthy predictions for market behavior in 2017, to less provocative commentary to broader financial trends, to wild assertions feeding investor fears of gloom and doom. (By the way, economist James Dale Davidson, who states he correctly predicted the market drops of 1999 and 2007, appears to have missed the boat in his prediction of a market collapse in 2016, according to Motley Fool. As it turned out, the S&P 500 was up 13.43% as of December 27. But don’t worry, Davidson is making the same prediction for 2017!)
A common claim among the predictions is that the markets are “overvalued,” implying that investors should consider moving to the sidelines until stocks become more reasonably priced. As a new report entitled Prediction Season by Dimensional Fund Advisors (DFA) states, “Predictions about future price movements come in all shapes and sizes, but most of them tempt the investor into playing a game of outguessing the market.” That amounts to market timing, a practice that we at AMDG Financial don’t encourage. Why? Because, in our opinion, it just doesn’t work.
The DFA report provides a perfect example. Using the scenario of an overvalued market, the author examines whether an investor would be better off to move to cash. But it’s actually more than one decision (to get out of the market); it’s two, because the same investor would need to decide when to get back in. After assigning different probabilities of success for each decision, the report concludes that the odds of the investor being better off are roughly the same as a coin flip.
History supports the value of sticking to a long-term investing strategy. A chart in the DFA report shows how the U.S. dollar continued to grow in value over a 45-year period, despite bearish headlines.
The only thing we know for sure is that market performance will continue to be uncertain, so the best course of action is to understand what you can and can’t control, and act accordingly. Staying diversified can help manage risk, and ignoring bad news and crazy headlines can help you stay focused on our plans for long-term financial well-being. Investors need to see wild prognostications for what they are: a self-interested attempt to entice them into a transaction based on fear.
Make it your New Year’s resolution to either develop – or stay with – your strategy. Our role is to help you understand the facts, eliminate emotional bias, and focus on what you can control. If you’d like help creating a plan, or would like a second opinion, resolve to contact AMDG Financial in New Year. We’re a fee-only, fiduciary Registered Investment Adviser, and we’d welcome the chance to work with you. Happy New Year!