How often are we taken in by the “Experts”, “Gurus” and similar “Talking Heads” who are wont to be seen as seers and prognosticators?

They appear on our televisions and in the newspapers that we read and are are a dime a dozen on the popular financial internet sites and will tell us that “the market”, a sector, a stock or a currency will end the day/week/month/quarter/year/whenever at or around a certain level.

“Bloomberg surveyed Wall Street strategists at the end of 2016 and, as a group, they predicted that the S&P 500 index would rise 4.2 percent. It returned over 21.8 percent. According to the Wall Street Journal, in past years the gurus have missed the return of the S&P 500 index half the time by more than 9 percent, which is close to its long-term average return. Gurus predicted gains in the years when the dot.com and real estate bubbles burst. The list of guru failures is endless.”*

So why do we do it? Why do we listen to these predictions if they are so frequently wrong?

It’s a very human characteristic to have an intolerance for uncertainty and this leads us to feel out of control. When an “expert” tells us what is going to happen we begin to assuage our feelings of discomfort, but all to often this is replaced by the delusion of control.

If you choose to base your investment decisions on following what “the experts” predict, you must make peace with the fact that, although they may get lucky from time to time, they are going to miss the mark regularly. And the result will be that, more often than not, you will end up not where you need to be, but somewhere else. And frequently missing your mark will leave you a long way from where you need to be.

So if we know that trying to follow the prognosticators is the wrong thing to do, what is right? First, realise that the desire to follow these soothsayers is a natural one. You are normal. Second, realise that if you choose to follow them you are frequently likely to be wrong.  Third, make peace with the uncertainty that comes with not knowing what the future holds and focus on those factors that you can control.

  • Diversify your investments (it reduces risk)
  • Take a long-term view (things over time tend to be more likely)
  • Hold the line (constantly changing your strategy to focus on prevailing conditions is a sure fire way to fail)
  • Work with an advisor who doesn’t have a crystal ball and won’t lie to you that they know what the future will bring.

Businessman Predicting Future With Crystal Ball

* Thanks to Scott MacKillop over at WealthManagement.com for bringing the research to my attention.