Optimism, Expectations, and Random Markets

Let’s say you’re planning on taking a family vacation next week to someplace warm and sunny. You’ve only got four or five days before you leave, and you’re trying to determine what you need to pack. Today, the weather forecast says it’s going to be sunny with clear skies and not a chance of rain. Yesterday, meteorologists said there would probably be a storm moving through and that there was a 70% chance of rain. The day before that? Of course, they were saying that it would be sunny again.

With all of this back-and-forth, how can you possibly prepare for your trip? You think about it for a moment and then decide you’ll err on the side of optimism. What kind of weather do you want there to be? You want it to be sunny, right? So, you decide to leave the umbrella and raincoat behind. Positive thinking!

In this scenario, what happens when you end up going on your trip? Well, I think instead of giving away the ending, I’ll just leave you in suspense! I don’t know what happens, and neither do you. The meteorologists can’t even say for sure what is going to happen. And that is precisely the point! You may have the vacation of your life, or it could be completely ruined. Nobody knows how the weather is going to turn out, because the outcome is—for the most part—random…and it is completely out of our control.

Now if the weather is random and difficult to predict, how much more unpredictable do you think the stock market is? There are a lot of variables in measuring both the weather and the economy, but the market has one additional variable that makes all the difference—human behavior. The storm may come through, or it may not—but it most certainly will not decide that it wants to come through. The weather doesn’t have motives, and it doesn’t make decisions. People, on the other hand, make countless decisions every day based on a complex array of desires—and these people are the ones who drive the market, making it all the more unpredictable.

Financial advisors will try to sell you on what they believe the stock market is going to do, in an attempt to save you from a disaster. If you invest in stock markets, though, no one can rescue you from the down periods. If markets were not random and unpredictable, they wouldn’t offer higher expected returns. Markets randomly and unpredictably go up and down. Period.

So, does that mean that you shouldn’t be optimistic in your investing? Well, that depends on what you mean. Here’s the bottom line: you should be optimistic about the things that you can control and realistic about the things that you can’t control. So, when it comes to trying to gauge what the market is going to do, just accept the fact that you aren’t going to be able to do it. Just play it safe and pack both your swimming trunks and your raincoat.

However, what you can be optimistic about is your ability to make wise financial decisions for yourself. By all means, believe in your ability to move your life in a more positive direction. You can do your own research, teach yourself good habits, and find mentors you can trust. If you need help understanding how to sort out when to be hopeful and when to be reasonable in your investing strategy, feel free to reach out to us for a complimentary conversation. We’re not sure what the market’s going to do, but we believe in your ability to invest wisely in it.