• Bernhardt Wealth Management

Who Should You Listen To? Market Predictions and the Individual Investor

As in every year, the last weeks of 2019 saw a host of predictions and prognostications for the coming year. Many market pundits—including analysts for several major financial firms—were predicting a low likelihood of recession for 2020, worldwide economic expansion, a lackluster future for tech stocks, and other assorted notions. Important factors that none of the prophets foresaw included a worldwide pandemic and economic shutdown, a 35% market downturn, and a sharp tilt into recession. Furthermore, once those events began to unfold, virtually no one was predicting that by the end of the year, the markets would have made new all-time highs.

“But wait,” you say, “the pandemic was a ‘black swan’ event; no one could have seen that coming.” You are right—and that is precisely the point. No one has the ability to predict what next week’s or next month’s financial headlines will be. And yet, year after year, many investors look to the financial media for hints that indicate where the money will be made during the coming period. Because our human nervous systems have evolved to place tremendous importance in recognizing patterns in the surrounding environment, it’s easy for us—market prognosticators and individual investors alike—to ascribe predictive power to events that actually turn out to be random.


This tendency to see patterns in the financial markets where none exist is sometimes called “pattern recognition fallacy”; it is one of the classic behavioral investing traps that unwary investors—and even some seasoned professionals—regularly fall into. In fact, it is also the frequent downfall of habitual gamblers. Because our brains have been conditioned to find and use patterns as a means of survival, we are “hard-wired’ to see patterns all around us, even when they aren’t really there.


It works in other contexts, too. In 2012, Brett Cohen decided to conduct an experiment in pattern recognition. He donned some sharp clothing, styled his hair, put on sunglasses, persuaded a team of acquaintances to dress in dark suits and act as his “bodyguards,” and went out among the crowds in the streets of New York City. Within moments, excited crowds began to gather around him. They called out his name, tried to get his autograph, wanted to take selfies with him. Reporters, in on Brett’s gambit, interviewed bystanders, who spoke eagerly about how much they admired Brett, asserting that they had seen him in one of the Spiderman movies, among other things. For a few minutes, Brett Cohen was the most “famous” person in the vicinity; dozens of people “recognized” him, based on perceived patterns associated with celebrities.


The reality? Brett Cohen has never been in a movie in his life. He is a YouTuber (with many more followers, these days) who carried out an elaborate and skillful prank, based on his knowledge of the power of pattern recognition.


The same thing happens in the financial markets. Based on conditions observed previously, individuals make cause-and-effect predictions that may or may not prove reliable. The simple fact is that no one can accurately predict future stock prices—even for entire classes of stocks—with any better than random accuracy. But because investors—and even investment professionals—tend to see the world in terms of results, rather than processes, we often infer cause-and-effect relationships where none exist. This can lead to costly errors in investment judgment.


What’s the answer? Should you pay any attention at all to the experts and their predictions? Actually, it never hurts to listen to other perspectives, especially if they are based on analysis. But you should never assume that any expert knows what is going to happen—because they don’t. Instead, you should formulate a long-term strategy that is founded on what is most important to you: your goals, aspirations, and core priorities. You should build a diversified portfolio that conforms to that strategy, and you should maintain discipline, based on solid, empirical evidence, in sticking with your plan over the long haul. Decades of research demonstrate that investors who do these things will, over time, generally achieve their most important financial goals.


To learn more about how we work with clients to develop wealth management and investment strategies that focus on proven principles—not the latest market predictions—click here. And if we can answer any questions or provide assistance, please contact us.


Buen Camino!

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