I'm the host of the Stay Wealthy Retirement Show and founder of Define Financial, an award-winning retirement and tax planning firm. When I’m not helping people lower their tax bill, you can find me traveling with my wife and kids, searching for the next best carne asada burrito, or trying to master Adam Scott’s golf swing.
What If You Had Tomorrow’s News Today?
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At the start of each year, we are bombarded with predictions for the year ahead. So far, I’ve heard that rates will continue falling alongside inflation, while the stock market will continue its torrid run. I’ve also heard that inflation will flare up again, causing the Fed to pause its “easing” and potentially raise rates again. 😳 Opinions about what the market will do next are all over the place, but there isn’t a shred of wisdom to be found. That’s not because these people aren’t smart—they are. It’s just that the future is unpredictable. In today's email:
Let's dive in 👇 Tomorrow’s News TodayMost people’s crystal balls are cloudy at best. But if you think a working one would be useful, let's examine how individuals fare in the market when they “know the future.” That’s not hyperbole... This was a real experiment conducted in 2023 by Victor Haghani that was highlighted in a recent Wall Street Journal article. The experiment, aptly named the “Crystal Ball Trading Game,” offers a fascinating insight into the value of predictions. Here are the parameters of the experiment: 1. Each investor started with $1 Million. 2. Investors were presented with 15 random front pages of the Wall Street Journal, one from each of the last 15 years. 3. Of those front pages, 5 featured employment reports, 5 highlighted Fed announcements, and 5 were random days in the top 50% of volatility rankings. 4. Investors then invested their money based on those front pages, effectively knowing the future. 5. Investors could choose to add leverage based on the confidence of their predictions. So, how did the investors do while “knowing the future?” It turns out that they didn’t do so well:
“Through Thursday, more than 8,000 mostly financially savvy players had taken a crack at the game. Their median ending wealth after 15 rounds was just $687,986, according to the data provided by Elm. Many lost everything.” ~The Wall Street Journal
"Knowing the future” didn’t seem to benefit them much. If anything, it hurt the majority of investors. Furthermore, despite knowing the future, more than half of the players couldn’t even predict the basic direction of the stock market! This means that most investors would have performed better in this experiment if they had flipped a coin and applied minimal leverage. So much for prescience. Nassim Taleb once famously quipped: “I conjecture that if you gave investors the next day’s news 24 hours in advance, he would go bust in less than a year.” With a median loss of more than 30% of their beginning wealth over just 15 days, Taleb is probably right. This brings us back to the pundit forecasts we referenced at the beginning of this note. If investors who truly “know the future” can’t predict the market's future... ...what chance do those who know nothing about the future have of predicting what the market will do next? I think that’s rhetorical. 😊 Although it seems counterintuitive, this understanding should actually provide comfort and encouragement. It liberates us from the false notion that knowing what will happen next is essential for successful investing. In reality, that is not the case, and history backs this notion. What best positions investors for success is a willingness to invest in accordance with their thoughtfully constructed financial plans for decades on end, despite this unavoidable uncertainty. If you agree, I recently updated our Investment Review Checklist (PDF) to help you take action. Need Professional Retirement (and Tax) Planning Help?My team and I only have a few more openings for Discovery Meetings this quarter. If you're looking to hire a retirement and tax planning expert, we would love to have a conversation! We do our best work with retirement savers aged 50+ who have a nest egg between $2 Million and $10 Million. To help you evaluate our firm, we offer a Free Retirement Assessment. 👉 Learn more and schedule a meeting. Thank you for reading! Hit reply to this email if you have any questions, feedback, or suggestions for future topics. Stay wealthy, Taylor Schulte, CFP® |
Taylor Schulte
I'm the host of the Stay Wealthy Retirement Show and founder of Define Financial, an award-winning retirement and tax planning firm. When I’m not helping people lower their tax bill, you can find me traveling with my wife and kids, searching for the next best carne asada burrito, or trying to master Adam Scott’s golf swing.
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