As we look at the 2011 year in review, remember that “this too shall pass”. New Year’s Resolutions are about to begin and as we look forward to 2012, make a New Year’s resolution as it relates to your finances. Take the 30 day challenge, look at income needs vs wants and get a “real” budget in place.
Last week, the Wall Street Journal ran interviews with four financial advisors soliciting their outlooks for 2012. Specifically, the Journal asked these sages to forecast which sectors had the most promise and which ones investors should avoid next year.
The Journal asked the following question: “What are you expecting for the markets and the economy in 2012? Do you think this crazy volatility we’ve had this year will continue?”
Each advisor had plenty to say about what they thought would happen next year. Each had his or her specific forecast. Certainly, I would expect these advisors to have their clients invest according to their idea of what will happen in 2012. But what if their forecast was wrong? How would their clients fare?
Now suppose I was on that panel? What if I was asked to give my forecast of what the markets and the economy will bring in 2012?
Ready for this? My honest answer, after 20 years in this industry, would be:
“I just don’t know.”
The Truth is that nobody knows what’s going to happen in 2012, or in any other year. The Truth is that investing according to somebody’s forecast is nothing more than gambling and speculating with your money. When you think about it, isn’t investing according to any kind of forecast the same as relying on somebody’s guess about tomorrow’s news?
The future is unpredictable. Here are just a few examples of the unknowns and unknowables that could affect the markets and the economy in the upcoming year:
* Nobody knows who the next president will be.
* Nobody knows what will happen with the Euro.
* Its anybody’s guess what will happen in the Middle East.
* Who can guess what China, the country that holds over a trillion dollars of US debt, will do in 2012?
* Does anybody know what kind of natural disasters might occur next year?
There are millions, if not billions, of unknowables, all which can affect the stock market. Couple all of this with the proven fact that, unless the news is TOTALLY unexpected, the markets do not react to what is happening on the day of the news. Markets act according to what the “Wisdom of the Crowds” believes is going to happen three to six months down the road.
This Truth makes it impossible for anything but luck to be the major and overriding factor as to whether any so-called forecast is accurate.
So, is there anything that a prudent investor can do?
There sure is:
As my friend Mark Matson, the president of Matson Money in Cincinnati says in the Fox Business interview linked below, there are 3 Simple Rules to Investing for long term success.
1) Own equities long term.
2) Diversify globally.
3) Rebalance.
And I would add a fourth rule.
Stay disciplined in good times and in bad. The markets never go up in a straight line. And they never go down in a straight line either. While nobody knows what will happen from day to day, the long term trend of the markets has always been in the positive direction.
Here’s the video link. Let me know what you think!
http://video.foxbusiness.com/v/1318366612001/three-simple-rules-for-every-investor/?playlist_id=87247
Happy Holidays!!