The Danger of Using Predictions to Guide Financial Decisions

I was reading an article today where the author’s main argument was that the US economy was in better shape than the rest of the world and was therefore a great place to invest. There was one paragraph that stood out to me, not for any investment advice but for an insight into the dangerous psychology behind the world of investment prediction. The paragraph reads as follows:

At the same time, the IEA predicts that the U.S. is expected to emerge as a major exporter of natural gas in the next five years and that it could become energy independent by 2035. This is a far cry from the looming peak-oil theory that dominated the conversation among global thought leaders only five years ago. And the U.S. isn’t alone; much of the rest of North and South America suddenly is using new technology to replace energy reserves at the fastest rate in decades.

Here’s what stood out to me. Currently, this article is touting the prediction that the US will be energy independent by 2035, which is a great sign for the US economy. The author also mentions, almost as a throwaway, that this prediction is the exact opposite of the prediction experts were making just five years ago.

So let’s break this down. If we were to follow the expert’s advice, then five years ago we would be panicked about the US’s energy dependence and would be selling US stocks like crazy. Now, just five years later, our energy future is full of rainbows and sunshine and we should be buying US stocks like crazy.

So what happened? Well, either the experts were wrong five years ago or they are wrong today. Or they could be wrong both times. In any case, the real lesson to be learned here is that these so-called experts are no better at making predictions than any of the various coins I have rattling around in my pocket.

Many young parents avoid investing for their future because it seems so complicated and they don’t want to add anything else to their already busy lives. I mean, when your free time is spent chasing a toddler around so he doesn’t dive down the stairs or inhale a bottle of cleaning fluid, how can you possibly be expected to keep with the the financial markets and move your money in and out at the right times?

The truth is that you can’t. But the good news is that the best strategies actually don’t require you to do anything like that. While there are many “experts” out there who want to sell you their latest and greatest investment advice, the truth is that they will be wrong most of the time. Good investing is simple, consistent and boring and doesn’t require you to keep up on any financial news.

Keep it simple, save regularly, ignore the noise and get back to playing with your kids. That’s the only hallmark of success.