The folly of predicting market downturns

6 August 2018

I’ll start this article with a prediction.

At some point in the future, the sharemarket will go down. It might go down in a big way.

Phew! I said it.

What exactly did I say?

But what did I say, exactly?

The sharemarket will go down. Which is a truism – it goes up and down all the time.

What didn’t I say?

It’s probably more revealing to ask: what didn’t I say?

I didn’t say when the sharemarket will go down.

“At some point in the future” is a statement that’s so general it’s almost useless. It could mean anything. The timing could be in the coming days, weeks, months, or years.

And what sort of downturn am I talking about? I’m not even making a firm statement about the scale of the downturn. It might go down in a big way. It might not, too. If the market goes down by 0.1% on a given day, I could probably say my prediction was correct.

But hand on heart – that’s as accurate a prediction as I can make. And I’d argue that it’s as accurate a prediction as anyone can make.

The market value of any share – and the sharemarket in aggregate – is the consensus view of many smart, intelligent, dedicated, well-resourced, incentivised people. They’re not valuing these shares on the value of their current assets and earnings. The values of these shares are based on their expectations and predictions about how these shares and the sharemarket, in general, will function in the future.

I could argue with each of these individuals. But I’m not inclined to second-guess the collective wisdom of all of these people.

Shares and the sharemarket only go down when expectations and predictions go down. The reality is, a downturn predicts itself.

Focus on what you can control

We all know there will be sharemarket downturns. It’s part of investing in shares. Predicting the timing and size of these downturns is an impossible challenge. It’s out of our control.

Instead, we should focus on what is within our control. This includes making sure our financial plan and investment strategy is tailored to our personal circumstances, needs, objectives, values, and priorities – including our personal tolerances for risk.

If the plan is suitable for us, it’s suitable regardless of the state of the market.

The timing and size of downturns is outside of our control and our ability to predict. Having a plan and sticking to it, regardless of the ups and downs of the market, is within our control.

Forget about predicting the market or trying to time market downturns. Predicting market downturns is folly. Focus on the things you can know and control instead.



financial plan, future, index funds, prediction

About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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