There are three things in life that are certain: death, taxes, and stock market uncertainty. So, before you make the mistake of trying to predict future market conditions, you should listen to our latest podcast episode.
In this short episode, I explain the dangers of expecting market certainty and outline four strategies for staying level-headed when market conditions inevitably go sideways.
This is the time of year when people in my profession do a couple of really annoying and potentially destructive things.
The first is that we talk about the prior year like everything that happened was totally obvious and predictable.
If it were, the person telling you how predictable it was would likely have made so much money trading on that knowledge that they probably wouldn’t be working still. They would likely be enjoying a fruity drink on their private island as we speak.
But they’re not, because what happened last year wasn’t obvious.
Now, this isn’t to say that we shouldn’t review what happened and try to learn from it.
We should all do that all the time, whether it’s examining our personal finances, our health, or how we’re showing up as a parent. That’s healthy.
What’s not healthy is acting like the past was obvious. That’s just annoying.
The second thing people in my profession do this time of year is try to look around corners and attempt to predict the future.
Now, there are two types of predictions here, and I want to draw out a distinction.
The first is long-term predictions, and these can be done with a little more certainty.
If we zoom out far enough and look at historical market performance, we see that markets tend to go up. And we can reasonably expect them to continue doing that over the long term.
Why? Because the world continues to evolve, adapt, innovate, and find new solutions to old problems.
Those innovations create an incredible amount of opportunity for our economy and generate enormous amounts of wealth. And, as long as we stay on the ride the entire time, we can participate in that growth.
The second, more destructive kind of predictions are short-term predictions.
It’s easy to understand why we try to do it: it’s human nature, and we all want to have an understanding of what we can expect going forward.
The problem is that the near-term future is unknowable. It doesn’t matter how smart you are or how many really smart people you have working with you — none of us can predict the future
Sure, we can look at historical patterns and match those up with current data, and we can make assumptions about where we think things are headed.
But that’s it. They’re just assumptions.
Recent examples of market uncertainty
Markets, like life, can surprise us in both good and bad ways — especially in the near term. We’ve got plenty of recent examples of this.
Think back to mid-2019. Do you remember anyone talking about the possibility of a global pandemic that would eventually shut down economies across the globe?
Or that a short time later, an unimaginable amount of fiscal stimulus would be pumped into the system, eventually leading to the highest levels of inflation in several decades?
I certainly don’t.
If we go back a bit further, we could talk about the impact of the housing bubble bursting — which would lead to some of the most severe economic conditions since the Great Depression — or the terrorist attacks on 9/11, or the tech bubble before that.
The point here is that these were all events that weren’t on our collective radars, but each had a significant impact on our personal finances.
Markets can be very volatile over the short term, and it’s usually the things we don’t see coming that impact us the most.
Now, does that mean we throw our hands up and act helpless? Absolutely not.
I’ve got a few suggestions that can help you keep a level head during times of turbulence.
Have a plan.
Having a plan with goals and being prepared for the unexpected can help insulate you from the fear of the unknown.
A good financial plan helps you know that you’ll be okay under a variety of circumstances, and it gives you the tools to increase the likelihood of success given a wide range of market conditions.
So, instead of wondering how current market conditions may impact your finances, you can easily and confidently check your plan and make adjustments as needed.
Do you adjust your spending? Do you work longer? Is it still okay to take that dream vacation?
A financial plan gives you the confidence to make those decisions and, ideally, sleep much better at night.
Have sufficient cash reserves.
Cash reserves — or a rainy day fund — are so important for a number of reasons. But in times of stress, they can insulate you from issues like a large bill you weren’t expecting or a decrease in income because of a job loss.
For investors, they can also keep you from having to pull money out of your investments when prices are depressed, giving your portfolio time to recover.
And, now that we can earn something on our cash again, it doesn’t hurt as much to have that money sitting on the sidelines.
Having a financial plan can also help you determine how much cash you should have available to you at any given moment.
Maybe it’s three to six months for someone younger and with fewer obligations. Or, maybe it’s two years’ worth for someone in retirement.
Those cash reserves increase the likelihood that you’ll stay in your seat when the ride gets a bit bumpy.
Ignore the noise.
Today it seems like everyone has an opinion, and because of the 24-hour news cycle and social media, we are constantly being inundated with them.
And what gets us to act faster than anything else? Fear.
Fear gets our attention — which is good business for people with things to sell.
It’s perfectly reasonable to stay current with the news, but it’s best to do so with an understanding that the people serving us that news — or their version of it — may have motives that don’t align with our best interests.
Look for opportunities.
If you have the capacity to go out on a limb a bit, uncertain times do create opportunities to lean into good, quality investments at a discount.
It’s the exact reason Warren Buffett keeps so much cash available — for times like these.
And while we can never know the exact perfect time to buy, if over the long term you can pick up something at a significant discount that you wanted anyway, you’ll probably be happy that you did.
But you will have to know yourself well enough to know whether you’ve got the tolerance and capacity to ride out any turbulence in the short term.