It’s that time of year again, when the public eagerly eats up articles, speeches and sound bites predicting where the stock market will close in 2014.
My problem with this annual ritual is that it’s a ruse that distracts people from investing, and leads them instead into unprofitable speculation.
No one knows where the stock market will end 2014 any more than someone knows that one roll of a die will land on 6. Someone may get lucky and guess 6 correctly, but everyone acknowledges it’s luck and not skill.
The skill with rolling a die is knowing that any one roll cannot be predicted, but that several rolls will converge on an average number of 3.5.
I just rolled a die 57 times. On the 11th roll, the average converged above 3. On the 57th roll, it had converged on 3.175. If I kept doing it, it would converge on 3.5.
The same is true with the stock market. Predicting one year’s return is impossible, but knowing the trend over time leads to a converging solution.
By my estimates, I think the S&P 500 will return 0.9% over the next 5 years. Now, that’s not one roll of the die, but several.
And, that could occur as 5 years of 0.9% returns, or as 4 years of 12% returns and one year of -33%, or as 2 years of -33% returns and 3 years of 33%. You get the idea.
I don’t know any one year’s return, but I can understand the underlying nature of the system and predict where things will converge.
The longer the period, the more confident I am in my prediction. That 0.9% 5 year prediction doesn’t carry a lot of confidence any more than 5 rolls of a die will end up averaging 3.5 with much confidence. But many rolls makes me more confident in my prediction.
That is why I more confidently predict 4.4% returns over the next 10 years, and even more confidently predict 5.6% returns over the next 15 years.
Thinking about next year’s return and acting on that “thinking” is pure speculation, and a sure-fire way to lose money over time.
Instead, focus on the longer run where the predictions are more accurate.
The market isn’t cheap, so don’t expect high returns over the next 5, 10 or 15 years.
But, that doesn’t mean we won’t have high returns in 2014.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.