December 23, 2020

Prediction Season!

21 minutes

It’s that time of year: Prediction Season!

Along with new year’s resolutions, it’s time for economists and money managers to make market predictions.

Some will be gloom and doom, constructing elaborate arguments about how the market is greatly overvalued and about to crash. Others will be optimistic, explaining why there’s still opportunity in the markets and room for stocks to move higher. Some are merely trying to justify what they did or did not do last year or sell you on the strategy they plan to employ for the coming year. All of them will produce coherent arguments that can be quite compelling.

Half of them will be right, and the other half will be wrong.

They can’t all be right

How do you know to whom you should listen to? You can’t know, and you don’t know. The markets will do what they are going to do, and the economy will do what it is going to do, regardless of what the talking heads on MSNBC, the cover of Forbes Magazine, or the latest “Economic Outlook for 2020” from a particular fund manager says will happen. No doubt, some of them will be correct but as they say even a stopped clock is right twice a day. Figuring out which predictions will be correct can only be done with the advantage of hindsight.

So, what do we do?

A well-constructed portfolio is built around the principles of risk and reward, and how different types of funds work together over time. Rather than try to predict the market’s direction, it is a far better strategy to build a portfolio around your need for return and your tolerance or risk, built to last regardless of which talking head on TV or fund manager’s newsletter proves to be correct.

Shotwell Rutter Baer’s bold predictions for the coming year:

Something will happen that will make you think you should sell all your investments. This is not a terribly bold prediction. Between the pandemic and politics, this past year had dozens of events that made all of us think the market was about to crash, and no doubt the coming year will have plenty of scary headlines. The markets will react, but that reaction is always unpredictable. Tax policy, the environment, foreign affairs, terrorist activity, take your pick – there are always things to worry about and there always will be. In the long run, the economy and the markets continue to grow.

The stock market will be up and down in 2021. We are confident in this prediction. There will be good stretches for the market and there will be bad stretches. How long either will last, when the trajectory of those periods will change or where the market will finish the year, is a blind guess. Even good years have their down periods. 2020 is on track for the S&P 500 to finish up 17%, but at one point the market was down 34%. That’s an extreme example, but 2019, also a good year saw the market finish up 31% but was down 7% for the year halfway through.

Some company’s stock will do well, and you’ll wish you had bought it. You may be tempted to buy it even after it has done so well. Fear of missing out is a real issue for investors. This year’s stock was Tesla. Even in hindsight, the stock’s meteoric rise seems ridiculous and very exciting. However, your portfolio should be boring. Stick with a diversified, well-constructed portfolio and, as we discussed in this article (link), leave individual stocks alone.

You will face unexpected expenses. Another not-so-bold prediction. Doesn’t something always come up? Be ready for it. Having a proper emergency fund and a spending plan is far more important to your financial well–being than any prediction about what the stock market will or won’t do over the next twelve months.

Your plans will change. We spend a lot of time talking to clients about their goals and their vision for their future and helping connect those goals to their financial plan. But every year, we see our clients’ plans evolve. That’s part of life and should also be part of the plan. Flexibility is important.

Sound financial principles, such as living within your means and sticking with a prudent investment strategy will be more important down the road than anything any market pundit predicts will or won’t happen.

About Shotwell Rutter Baer

Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.

Click here to learn about the Strategic Reliable Blueprint, our financial plan process for your future.

Call us at 517-321-4832 for financial and retirement investing advice.

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