The anxiety caused by both a volatile stock market and an existential threat to our health transcends anything most of us have experienced. Our stress would be greatly alleviated if only we could find answers to very basic questions, like:
- When will there be an effective treatment for Covid-19?
- What about a vaccine?
- When will my life return to “normal”?
- Where’s the market headed?
It’s very frustrating when we turn to “experts” and they can’t provide answers.
We’re one of those experts.
An important limitation
Thinking we know more than we do is called “illusory superiority.” For financial advisors, it can be particularly dangerous.
Of course, we wish we knew the direction of the market. If we did, we could remove uncertainty and alleviate stress for our clients.
Here’s the problem. The future direction of the market will be driven by tomorrow’s unexpected news. No one can possibly predict that news.
For example, if a vaccine or effective treatment is announced much sooner than anticipated, the market is likely to react positively. But if a promising treatment fails in clinical trials, you can expect a negative reaction.
Because we understand our limitations, we don’t focus on factors we can’t control. That’s why our advice is to prepare an investment plan with a suitable asset allocation, globally diversify, keep costs and fees as low as possible, and defer or avoid taxes when possible.
The final piece of the puzzle is behavioral finance. It’s our job to prepare you in advance for sharp downturns in the market, provide perspective and demonstrate why investors who have stuck to their plan have historically earned higher returns than those who didn’t.
Emperors with no clothes
It’s sad that investors continue to rely on emperors with no clothes, who make predictions about random and unknowable events. Famed author and financial journalist Michael Lewis summed up the problem nicely in a post on Bloomberg.
Lewis noted that in order to succeed on Wall Street ...you must believe, or at least pretend to believe, that you are an expert in matters where no expertise is possible. I’m not sure it’s any easier to be a total fraud on Wall Street than in any other occupation, but on Wall Street you will be paid a lot more to forget your uneasy feelings.
Most investors have a high regard for Warren Buffett, yet many ignore his wise counsel about ignoring forecasters: "We have long felt that the only value of stock forecasters is to make fortune-tellers look good."
Relying on predictions is harmful to your emotional and financial health. Don’t succumb to the temptation to find certainty where it doesn’t exist.