When darker clouds roll in, my girls often ask me if it’s going to rain. I used to look at my phone and see what the latest hourly forecast shows. There are multiple apps, including The Weather Channel, that will give you the percent chance of rain each hour. The problem is these forecasts are constantly changing and quite unreliable. One minute it’ll tell you there’s a high chance it’ll rain the next hour. 15 minutes later the app will tell you there’s no chance it will rain for six hours. Try explaining that to a four- and two-year-old.
The truth is that the best meteorologists in the world can’t reliably predict where it’s going to rain each hour. They are trying to bring a sense of control and certainty when it’s just not possible. I’ve learned to be honest with my girls about that. I tell them it’ll rain somewhere in our area at some time, but we can’t predict if it’ll rain on us. Instead, we plan around it. If we get a little wet, that’s okay.
Investing is the same way. People are constantly trying to make predictions because it gives them a sense of control. No amount of fundamental research or technical analysis will help you predict where stock or bond prices are going in the short-term. Short-term movements are based on people’s reactions to random new information. There isn’t a pattern you can use to control your outcomes.
Over longer time periods, there is information that can help you craft an intelligent investment strategy. The current yield (interest rate) on a high-quality bond is a good predictor of the returns you’ll receive from now until it matures. I can’t tell you what you’ll earn as that bond is marked to market the next month or next year, but I can tell you what it’ll pay you at maturity. You can plan around that.
The same thing is true for stocks. Valuations like price/earnings don’t tell you anything about short-term returns (see last month’s blog), but they can help predict the next decade’s returns.
Go ahead and throw out any short-term predictions about investments and hourly weather forecasts. They may have entertainment value, but otherwise don’t matter. Keep your focus on longer-term predictions and use those to plan your days, your portfolio, and your life.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.