Ep #102 – What to Do When Markets Get Scary
We discuss the pitfalls of relying on market forecasts and expert predictions during market volatility. We emphasize the inaccuracies of financial forecasts and the psychological tendency to seek out such predictions. We advocate for a disciplined, evidence-based investment approach. We discuss sticking to your pre-planned strategies, diversify globally, and rebalance portfolios regularly, rather than reacting emotionally to market noise. The episode underscores the importance of critical thinking and focusing on long-term financial goals.
What You’ll Learn in Today’s Episode
Market Predictions and Forecasts: Market forecasts are often inaccurate. Historical data shows that Wall Street forecasts miss their targets by large margins, making them practically unusable. Experts' predictions, especially those by famous or confident experts, tend to be less accurate.
Human Nature and Financial Decision-Making: Seeking expert guidance during market turbulence is human nature. Our brains are hardwired to conserve energy and often offload decision-making to others. However, relying on financial experts' predictions can be detrimental, shutting off critical thinking.
Investment Strategy During Market Crashes: Investors are advised to stick to their pre-planned strategies during market crashes instead of reacting to market noise. Focusing on one's long-term goals, risk tolerance, and time horizon is crucial, rather than trying to time the market based on forecasts.
Diversification and Rebalancing: A well-diversified portfolio, spread across global markets, is essential. Regularly rebalancing the portfolio based on a predetermined plan helps maintain the desired asset allocation and removes emotional decision-making from the process.
Evidence-Based Investing: Investment decisions should be grounded in evidence-based principles. Adapting strategies only when new, academically supported research emerges or when personal financial goals and situations change ensures a more reliable approach to investing.
Ideas Worth Sharing
· "Forecasts don't work, and neither does investing based on these forecasts."
· "No one can time the market. Stick with the plan."
· "Listening to financial experts on TV actually shuts off critical thinking."
· "Focus on what you can control and ensure you're getting your information from good sources."
Resources
5 Reasons Not to Trust Stock Market Crash Predictions
What should you do when stock markets turn volatile or even crash? It's natural to seek guidance on whether your retirement savings are still on track. Yet when uncertainty strikes, a chorus of so-called experts often rush in with dramatic predictions of what's next for markets. You'll desperately want to listen because anything feels better than not knowing. But here's the catch - research shows most Wall Street forecasts completely miss the mark.
According to studies by finance professor David Dreman, the vast majority of predictions made by analysts miss their targets by gaps so wide the forecasts are "practically useless." Whether under or overshooting actual numbers by 15% or more, Dreman found Wall Street estimates have barely a 0.6% probability of landing within 5% of the true figure. The data is clear that most market forecasts do not work out in practice.
Yet our brains have a bad habit of gravitating toward the most confident-sounding experts, even when they are the least accurate. The more famous the forecaster, the more likely their predictions will flop. Why does this bias persist? Our energy-hungry brains have evolved to conserve resources whenever possible. Giving decision-making duties to others gives our mental capacities a break. Studies reveal that listening to financial TV pundits can shut down critical thinking. This so-called "cognitive respite" feels efficient now but causes us to stop carefully analyzing the situation.
If you want thoughtful guidance for your finances without doing all the heavy lifting yourself, work with an advisor who knows your situation. Understand your specific dreams, risk appetite, time horizon, and more. Not a loud-talking head who has never met you. A good advisor will help you stick to a long-term, personalized plan to weather inevitable market swings rather than make reckless forecasts.
So, amidst the current volatility, what should you focus on? Tune out sensational market headlines and evaluate if your investment portfolio aligns with your financial goals, timeline, and tolerance for risk. Make level-headed decisions based on evidence-based principles for smart diversification and asset allocation—Rebalance on a regular, predetermined schedule rather than getting swept up by market euphoria or panic. And be open to carefully considered strategy adjustments as new academically-backed research emerges or your needs evolve. But for the most part, stick to the prudent plan you built during calmer times. You can ride out temporary market mayhem with a personalized, patient approach.
Frequently Asked Questions
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Critical thinking is crucial in retirement planning, especially during times of market volatility. By questioning market forecasts and expert predictions, you can make more informed decisions that align with your long-term financial goals. A disciplined, evidence-based approach ensures that your retirement plan remains on track despite market fluctuations.
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To navigate the psychological challenges of market volatility during retirement planning, it's crucial to concentrate on controllable factors like investment strategy, diversification, and regular portfolio rebalancing. Partnering with a retirement navigator or financial advisor can also provide valuable guidance, helping to maintain discipline and ensure that decisions are driven by a long-term plan rather than emotional reactions to market fluctuations.
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Evidence-based investing involves making investment decisions based on academically supported research rather than market forecasts or expert predictions. By focusing on long-term financial goals and adapting your strategy only when new evidence emerges, you can achieve a more reliable and consistent approach to retirement planning.
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A financial advisor offers personalized guidance tailored to individual retirement goals, risk tolerance, and time horizon. Rather than attempting to predict market movements, a skilled advisor focuses on helping clients adhere to a long-term, evidence-based strategy, ensuring that market volatility is managed with confidence and without emotional decision-making.