Making investment decisions wholly on forecasts is ‘a fool’s errand’

With economic predictions varying about the Federal Reserve’s decision to cut interest rates ahead of the jobs data set to be released on Friday, GenWealth Financial Advisors’ Scott Inman joins Yahoo Finance Live to discuss why investors shouldn’t always fully rely on economic predictions.

Inman acknowledges that economic predictions are “valuable to some degree”; however, he notes that basing an investment strategy solely on predictions is “a fool’s errand,” as they often turn out to be inaccurate. He advises investors to adopt a long-term strategy, suggesting “ten years and longer.” Inman cautions that making “a drastic change” to one’s investment strategy based on short-term predictions may lead investors “to do the wrong thing, at the wrong time, for the wrong reason.”

The Get Ready for the Future Show Host points out that investors frequently make decisions driven by emotions, stating: “We as humans want to be able to control our future.” However, he recognizes that investors cannot truly control the future while market fluctuations evoke emotions that influence decision-making. This is why he recommends working with a financial advisor to help navigate market dynamics.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

Editor’s note: This article was written by Angel Smith

Video Transcript

– Scott, great to have you here with us today. As we think about prediction pitfalls that some people become too reliant on, what is the number 1 out there that you see time and time again?

SCOTT INMAN: Well, first of all, I’m going to admit to you that my bracket was in the trash after week 1. I didn’t even get into the second round and still have a chance. Didn’t get one Final Four team right.

– I’m right there with you.

SCOTT INMAN: When you think about economic predictions, I do love the analogy you drew to trying to predict a perfect bracket. You know, I’m not here to rain on those predictions. I think they are valuable to some degree. We follow economists, we read commentary, we look at the economic data. But it is just a snapshot when you look at all of that data of where we currently are. And I think as complex as trying to predict where we’re going is, it is very much a fool’s errand to really build an investment strategy around those predictions. Because they’re often wrong.

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– Some of those predictions are very imminent-telling or imminent-facing as well here. For people who are trying to position their investment strategy, their portfolio strategy, their retirement planning, or just financial future around things that are far, further off, how far out should and could they be looking? And how do they kind of stagger what those timelines look like?

SCOTT INMAN: Yeah. I think anyone who is investing in equities should have a long term strategy. And at GenWealth, we talk to our clients all the time about that long term strategy should be 10 years and longer. You should not really be looking at 12-month predictions and making drastic change to your investment strategy.

Certainly, asset allocation, sector rotation, some diversifying moves can be called for. But to bail out of the market entirely because you think it’s about to go down or get into the market at a high, which is what a lot of people do, can be, as we talked about, a fool’s errand. If you look at that three reasons to avoid economic predictions, we already talked about they’re often wrong. But it can cause you to do the wrong thing at the wrong time for the wrong reason.

If you look at COVID, for example, and that’s our most recent example of a significant downturn, certainly, that was a dire economic situation. And the market plummeted. And that caused a lot of people to jump ship from the stock market. But that was in March of 2020. We just recently passed the four-year anniversary of the pandemic low. And the S&P 500 is up 133% cumulatively and 25% annually since that time.

So now granted, that’s a four-year time frame. Some people may have jumped back in at some point. But they missed a lot of the ride back up if they waited too long. Technology was resilient during the shutdown, when we were all staying at home. Then the market rebounded quickly. That was not something you were hearing in the economic predictions.

– Of course now, past prediction does not always– or past performance does not always equal the future success rate here. So I mean, when we think about– and this kind of draws back to my own bracket as we kicked off this conversation, a lot of this comes back to emotion. How do you advise those out there to remove emotion from their own planning?

SCOTT INMAN: Yeah. I think that’s a big key. And that really is what drives this. We as humans, we want to be able to control our future. And that’s really what we’re talking about here, right? We’re seeking– our clients are seeking financial independence. They are wanting to control what they can control and they want to really begin to decipher what’s going to happen in the future as part of that. We can’t do it.

But our emotions, when we get fearful, when the market’s down or we get overly exuberant when the market is up, can cause us to make bad decisions. So in terms of answering your question, how do you control those emotions, we really believe working with a financial advisor is one of the best ways to do that.

And here’s why. If you have a good financial advisor, he’s objective. He or she is objective, first of all. They are not emotionally tied to your money like you are. You should be emotionally tied to your money, I’m emotionally tied in my own personal finances. But I’m not to my clients’. And I have an objective viewpoint. And that can help in the behavioral things that come up that can keep you from making those bad decisions.