Expertise Beyond the Numbers

Wealth Management Mantra for 2018: Stop Predicting, Start Planning

In the following blog post, Andrew Thompson, a Director with SC&H Financial Advisors, provides insights into long-term financial planning based on what’s in your control − and why you should avoid abruptly reacting to market changes or predictions.

Financial market turmoil has dominated the headlines in early February. With stories such as “Dow Plunges 1,175 – Worst Point Decline in History” and “Stock Markets Sink, Suggesting Global Rout Will Last”, it’s only natural to contemplate suddenly selling your securities.

But, during times of volatility – don’t panic. As hard as it may be to keep calm, it’s important to stay the course. Investors should stop themselves from trying to predict the future, and steer clear from making emotion-based financial decisions that could result in costly consequences. And here’s why.

Believe it or not, nearly $1 trillion has been removed from stock mutual funds since 2012.  As reported by the Wall Street Journal, this means millions of Americans have essentially missed all or most of the stock market’s 116% rebound since then, and its more than 300% rise since the financial crisis of 2009.

I would wager to bet most of those sellers of stock did so because of misleading news headlines that put them into a panic of what the stock market would do next.

This is why I try to avoid reading market outlooks and predictions made by the financial industry’s top forecasters (or perhaps fortune tellers) throughout the year. And believe me, doing so is like smelling Thanksgiving dinner without eating any of it.

But, I’m always well-rewarded for delaying gratification. At the close of each year, I take a few minutes out of my day to review headlines from the past twelve months – and more importantly, reflect on how grateful I am that I didn’t abruptly act based on this content.

For example, let’s look at a few more of the headlines from last year – many are full of big, scary words similar to what we’ve seen so far this month:

And, a few more quotes from the experts:

Even Fortune predicted the S&P 500 would finish 2017 where it started. Business Insider listed predictions from all of the major Wall Street banks and Investment firms. Bank of America Merrill Lynch foresaw the S&P 500 finishing the year at 2,300, while Oppenheimer came in with the highest target at a whopping 2,450.  Well they were close…if they were lopping horseshoes or hand grenades at you.

The S&P 500 finished up at…wait for it…2,674 for a total return of 19.42%.  Let’s sit with that number for a moment shall we?

The closest Wall Street firm forecast was 2,450, a mere miss of 224 points or 900 basis points (9%) while the low end, Bank of America Merrill Lynch, missed by 374 points or 1600 basis points.  These are staggering misses by the leading experts of the financial industry no less.

The tragedy of all of this is of course the impact it can have on the average investor who reads these headlines and predictions.

Based on the average investor’s historical rates of returns relative to their portfolio’s underlying index, I would wager to make my own prediction that many make changes to their investments based on the aforementioned expert predictions. The average investor underperforms their portfolio’s index by about 5%…had they done so at the start of 2017 (or 2016 for that matter), they would have missed out on portfolio returns twice that of the historical average.

It’s easy to poke fun at the experts who believe there’s value in attempting to predict the future.  Media outlets want you to believe market forecasting is a real news story worth your time and energy, especially if those predictions are bold and scary.  A headline that says, “2018 market returns are completely and utterly irrelevant to the long-term success of your financial plan” just doesn’t get the same eyes as “80% Stock Market Crash to Strike in 2018.”

When reading headlines, or watching the news, remind yourself that one’s ability to predict tomorrow is no better than a toddler.  For long-term investors interested in true financial independence, investment changes should always be the result of changes in your financial plan, not based on the words of fortune tellers.

At SC&H Financial Advisors, we believe it is important to reflect on the overall trajectory of the market – where it will trend over the next five years, ten years, and longer – rather than considering where it will go tomorrow.  We also realize wealth management is much more than just managing investments – it begins with creating a goal-specific, long-term plan unique to you and/or your family. This plan reflects what you’re hoping to accomplish, considers your current resources, maps to agreed-upon goals, and implements strategies that move you towards successful outcomes.

We understand that big, scary words like “biblical collapse” sell advertisement space for media outlets, and while there are certainly times scary things do happen in our world, it should never form the basis of one’s lifetime investment strategy.  The foundation of that strategy, we believe, should be solely based on what’s in your control − not a reaction to someone else’s attempt to predict the future.

So what can you control? You can create a sound financial plan that includes not only investments, but also considers:

  • Tax planning and compliance
  • Retirement transition planning
  • Insurance needs analysis
  • Estate planning

So stay the course, and focus on creating a comprehensive financial plan that fits your life now, as well as in the future. A plan based on your goals and objectives will be designed to navigate market ebbs and flows. And as tempting as it may be to take sudden action, inaction in this case is more powerful.

Interested in speaking with one of our financial advisors about your long-term financial plan, and the importance of staying the course when it comes to your investment strategy?  Contact our team here.

Advisory Services offered through SC&H Financial Advisors, Inc.