>The Folly of Forecasting

>I firmly believe that no one can correctly predict or time the movement of a market. Much like the mythical no exercise diet pill, all investors are looking for that crystal ball that will help them make a profit. Lao Tzu, a philosopher of ancient China and central figure in Taoism, once said “Those who have knowledge don’t predict. Those who predict don’t have knowledge.” How many times have you acted upon some “hot tip” only to lose your money? I was watching one of the famous “talking heads” before the health care vote and he told everyone to take their profits first thing Monday morning because he expected a substantial sell off. No sell off occurred, and we continued an upward movement in all the averages.

Why do people persist in forecasting the investment process? The answer lies in a behavior known as anchoring. Anchoring explains that in the face of uncertainty people cling to any irrelevant number as support. So it is little wonder that investors cling to a forecast, despite its’ uselessness.

The two most common investment biases are over-optimism and overconfidence. Overconfidence refers to a situation whereby people are surprised more often than they expect to be. People are generally much too sure about their ability to predict the movement of financial markets. This tendency is particularly pronounced amongst experts. That is to say, experts are more overconfident than lay people. This is consistent with the illusion of knowledge driving overconfidence.

Mark Matson, of Matson Money, once told me that “if an investor’s portfolio needs a forecast to be profitable then they have a flawed portfolio”. The markets are efficient and no one can predict where the market is going on a consistent basis.

So what is the answer? Contact me and I will be happy to discuss how to move away from forecasting and market timing and fix your portfolio. If you currently are a client you should know the answer. However, how many of your friends and colleagues don’t have a clue? Please share this with them. Your referrals are highly appreciated.

We are in the planning stages for some great educational events. Please go to our web site and check them out. Be sure to bring a friend so they can have a chance to find out what we do.

Thanks,
Bill

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About Riley Wealth

We’re here to help you achieve your financial goals, manage your money, and make your life better. Our firm is not like most other investment advisors. We are an independent advisory firm, with no ties to a large Wall Street firm. You receive advice unblemished by the conflicts of interest that have plagued Wall Street firms. We are free to recommend the best financial products to help you meet your goals. And with no sales quotas, we can devote the time needed to properly research and monitor your investments. You also benefit from our size. As a boutique advisory serving high-net-worth individuals, every relationship is important to us. With no national ad campaigns, we rely on referrals from people in our community to grow our business. You won’t be treated like just another account number, and there is no corporate bureaucracy when you need an answer about your money. Our staff understands that you expect excellent service.
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