Why we are terrible at New Year's resolutions and forecasting

"Those who have knowledge, do not predict. Those who predict, do not have knowledge."
— Lao Tzu, 6th-century BC Chinese philosopher

A healthy dose of humility

As a new year begins, we will see another whole new set of resolutions being made. Alcohol and cigarette sales drop and new gym memberships spike 50% as people put those new year’s resolutions to work.  

There is also another common feature. We see a deluge of forecasts and predictions pouring out of the financial media and the mouths of the “experts”.

Investment strategists all over the world perform their annual practice of predicting where the market will go in the coming year. Full of confidence and bravado, they forecast whether it will go up or down, and where it will end up. 

We are already hearing that 2024 might be a good year for value stocks, while some argue the “Magnificent Seven” still have room to go, or it’s time for China to recover finally. The forecasts are endless. 

Memories are short and there is naturally little mention of the nearly universal failure of the past to be able to predict with any precision. Little surprise that none of the strategists look back at their past forecasts as another year passes and another forecast is paraded out. 

It is a strange annual ritual that many people still follow and spend time on. Clearly, human beings are not known for having the ability to predict the future. We don’t even know how long our new year’s resolutions will last. We often cannot control our own behaviour, let alone predict the behaviour of tens of millions of participants in financial markets.

It’s safe to say that short-term predictions are fairly worthless, and paying attention to forecasts is a wasted effort. As economist John Galbraith once put it: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With a healthy dose of humility, we need to admit that we all have little clue of where the markets will go over the next year. 

Most of the time, strategists will just forecast a high single-digit return in any given year. This is because global stock markets have averaged 8-9% returns annualised. So these forecasts seem to make sense at first glance. 

But this prediction is clearly meaningless if every single year the actual return is significantly higher than predicted or deeply negative. Returns have fallen outside the range every single year and are never at the long-term average. 

In fact, any short-term price movements of 1, 3, or even 5 years are merely noise for the long-term investor.  2023 was a perfect example of how there has been much ado about nothing with global equities and fixed income up 23% and 7% respectively. 

It’s better to remain invested through cycles believing in the power of markets to generate average returns over the long term than try to beat the market every year not knowing where you are headed. 

Focusing on what works

While we thought that a post-COVID world would return to normal, what we have experienced so far suggests that we are never returning to that world of zero interest rates and stable prices and geopolitics. 

The unpredictability has risen generally, which probably means that people who make a living making forecasts are more likely to be even more wrong than right. Even more than before. 

Instead, we should focus on what matters and what works based on the science of investing and wealth, such as the power of markets and compounding, the benefits of diversification, and the importance of asset allocation.    

We know we cannot predict the markets, but we can raise the probability of success if we focus on long-term returns. The power of compounding and time will do the bulk of the heavy lifting without much effort on our part if we can remain patient with our money. Endowus’ desire to make investing easier so we can live easier today and better tomorrow is fitting here. 

Long term success can still be achieved without the hustle and bustle of daily stock trading or panic-driven activities in falling or rising markets. It is common knowledge that too much activity (and also too much choice) leads to poorer outcomes. 

The historic events of pandemic and war in the past few years have taught us that money isn’t everything and there are more important things in life — like health and family. But building wealth in the right way helps us tide through some difficult bumps along the way and it allows us to pursue the more important things in life. 

Harness the power of compounding

We also must remove the idea that “safe is good” or “cash is king” when it comes to investing our money. If we take anything away from the recent cycle, we should learn that interest rates and inflation always go hand in hand. Even with higher interest rates of our fixed deposits and T bills, we saw inflation running higher than that. 

The effect of compounding market returns as compared to leaving your cash in a checking account is clear in the chart above. If we had remained invested, the effect of compounded annual returns means that at the end of 2023, you would have enjoyed the tailwind of the markets showing positive returns in four of the past five years. This is true for all your investments but especially for long-term goals such as preparing for retirement. 

If I really needed to set a new year resolution, it would be let go of what we cannot control — the market direction, the economy, or what will happen to war and pandemics — but on the only thing actually within our control: our behaviour. 

In reality, relying on hearsay market predictions to formulate plans in advance often proves to be futile—history has repeatedly taught us this lesson. Instead of changing every year, what we truly need is to strategically design life goals for ourselves, our families, or other stakeholders, such as raising children, achieving capital growth, or acquiring real estate. By steadfastly progressing towards these objectives through a long term, diversified, and resilient investment portfolio, we can navigate the path with confidence.

Developing ongoing good investing habits may be the most important thing we can do this year and the only certain way to better prepare for a future that will always be uncertain.

To get started with Endowus, click here. Learn about dollar-cost averaging (DCA), and how it stacks up against lump-sum investing.

<divider><divider>

Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Opinions

Whilst Endowus HK Limited (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

No invitation or solicitation

Neither the information, nor any opinion, contained in this article constitutes a promotion, recommendation, solicitation, invitation or offer by Endowus or its affiliates to buy or sell any securities, collective investment schemes or other financial instruments or services, nor shall any such security, collective investment scheme, or other financial instruments or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. This is not intended to be an invitation or offer made to the public to subscribe for any financial product or other transaction.

This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.