Piedmont Financial Advisors

If you’re like a lot of people, the start of a new year has you taking a fresh look at your life and thinking about what the year has in store. Will you finally learn Spanish? What about learning to play that guitar that’s collecting dust in your closet? Will you get promoted at work and get a pay raise? Or are you hoping just to keep the job you have? Who will get elected President? How much Mayan end-of-the-world nonsense talk will you have to endure? Will the Indianapolis Colts take Andrew Luck as the number one draft pick? There are lots of things, important or otherwise, to either look forward to or to dread.

Do you think/worry about the financial markets or is it just me?

Around this time of year there is an overabundance of predictions of what the our financial future holds — stories about the direction of the economy and financial markets are no exception. Call it an occupational hazard, but as a financial advisor, I tend to read an unhealthy amounts of this “news”. As usual, the predictions are all over the board. Some market pundits warn of impending economic doom or at least a long and bumpy recovery; others think that we are on the front end of a massive bull market. These prognostications can sometimes be informative as discussions about the (perceived) state of the world can help you increase your knowledge, but mostly they’re a waste of time. Why?

Because they are likely to be wrong.

Most people, even professionals, are terrible at predicting the future

If you get 10, 100, or 10,000 people to make a prediction about the future, a few of them are bound to be right. The incorrect predictions are almost always forgotten. Steven Dubner, the author of book Freakonomics, says “if you look at academic study, one after the next, it turns out that even experts are only nominally better than a coin flip.”

So what can an individual do to make better financial decisions, especially investing decisions?

1. First understand

Broadly speaking, there are three economic conditions that can exist:

• Inflation
• Deflation
• Prosperity

The goal of an investment plan is to (1) provide reasonable protection in the event of either inflation or deflation and (2) provide an opportunity to participate during times of prosperity.

2. Have a plan and take action

Forget the predictions or trying to guess what might happen — focus on the things you can control:

1. Costs – work to keep investment, trading, and tax costs low
2. Diversification and risk – trying to earn a big return by making concentrated bets is a bad idea. Hold a reasonable mix of diversified mutual funds/ETFs and bond funds.
3. Cash buffer – you never know what life is going to throw at you so always be prepared by having at least 3-6 months of living expenses set aside in cash
4. Goals – know what you’re saving for — retirement, college, a new house — and invest appropriately

So practice some selective ignorance when it comes to the market predictions that the media pumps out and focus on the what you can control. It will make you be much better prepared for whatever does come true. It could be the best New Year’s resolution you make.