With only a few weeks left in 2013, it seems like the perfect time to talk a little more about one of the investing fundamentals: no one knows what will happen tomorrow. Even as you prepare to wrap up this year and begin a new one, your plans are based on what you “think” will happen. For the most part, this approach won’t trip up too many of us. However, we’ll run into problems if we make it the driving force behind our investing decisions.
Thinking Leads to Chasing
So much of what we think we know about the markets comes from trying to interpret things that may or may not have any relevance. The latest statement from the chairman (or chairwoman) of the Federal Reserve seems to get the markets excited, but what does it really mean to the individual investor? Then there’s the monthly job reports. The talking heads on TV seem to suggest we should look to these numbers for insights about what’s to come.
But here’s the hard reality for the individual investor. The things that play out on screen and in the news are events that rarely intersect directly with our own lives and decisions. But we don’t really hear that message. Instead, we hear that we should be doing “something,” even though there’s a high probability that we shouldn’t be doing anything.
Chasing Leads to Underperforming
One of the big drawback to “thinking” we know happens next is that we’re just as likely to jump into something when everyone else is jumping out. By trying to chase the market, we’re making some big assumptions, and those big assumptions can often lead to underperforming the market averages. Why? We have a tendency to buy high and sell low when we’re chasing the market because we’re inclined to rely on past performance to guide our decisions.
No One Knows What Will Happen Tomorrow
So if we don’t know, then what are our options? It comes down to managing the decisions we do control. We don’t know what the market will do tomorrow or next week, but we do know how much we can save each month to add to our 401(k)s or portfolios. We also know what goals we want to accomplish, and we can weigh our decisions based on whether they get us closer to those goals over time.
Also, by focusing on what we do control, it becomes easier to block out the noise of people trying to predict the market—something we know isn’t possible. Keep that in mind this holiday season and make it a point to turn off the noise and spend more time doing something you enjoy.