For some reason even people who know better can’t keep themselves from listening to “experts” who make predictions about stock markets, bond markets, interest rates, and other aspects of the economy. Unfortunately, these predictions are about as valuable as confident predictions of the numbers for the next lottery draw.
Many naive investors who lose money when stock markets drop are unhappy with their investment advisors. They think their advisors should have seen the losses coming and should have done something to avoid them. The truth is that no investment advisor can reliably see these things coming. These investors are doomed to be unhappy every time there is a significant drop in equity prices.
Expecting market predictors to make accurate forecasts is about as logical as expecting someone to be able to predict the next spin of a roulette wheel. How much money will you plunk down on number 23 if a well-spoken “seer” says that 23 will come up next? This makes about as much sense as relying on specific stock market predictions.
All is not lost, though. Even if we can’t make specific predictions reliably, we can say some useful things. Getting back to the roulette analogy, we can say that there are 38 numbers (1 to 36 plus 0 and 00) and that each has a 1 in 38 chance of coming up next. With this information we can answer such questions as how likely am I to double my $100 if I bet $10 on red until my money is either doubled or gone? (Answer: 26%)
The person who can properly analyze roulette can answer a number of questions, but can never predict what number will come up on the next spin. Similarly, investing experts can say useful things about the range of possible outcomes of investing in different types of assets, but cannot say what will happen to stocks over the next year.
The good news is that if an expert properly takes into account good and bad investing outcomes and their probabilities, it is possible to devise investing strategies that match an investor’s needs. But this is a very different process from making specific market predictions. Avoiding losses in investments that have risk is impossible; the real game is to control exposure to risk and to achieve life’s financial goals.