The holidays remind us that one year is ending and another is beginning. In the financial industry, it is also the season when predictions of the coming year's market performance, and where to invest, can be heard as often as Salvation Army bells. Now I don't presume to possess the ability to see into the future, but I do have some predictions to offer, and these might actually help you make money.
1. Investors will buy high and sell low.
Regardless of whether the market goes up or down, I predict individual investors and investment advisers will do the wrong thing at the wrong time. If stocks go up, they will buy. If stocks decline, they will sell. In short, I predict that investors will be predictably irrational, and that sticking to an investment allocation you can live with will have you going against the herd and coming out ahead in the long run.
2. The hottest investment will gather the most money.
I predict something will be hot in 2017, and investors will pour their money into it. Whether gold, master limited partnerships or stocks of a certain industry, billions of dollars will be flowing into that hot investment after the price has skyrocketed. I further predict the hot performance will cool, and that those who poured their hard-earned money into this sure bet will be disappointed.
3. Financial gurus will brag about their winners and not mention their losers.
I predict you will be inundated by videos, web stories and other media in which financial gurus will tout their winners and look absolutely brilliant doing so. You will wish you had followed their advice, but be careful what you wish for. They are almost certainly not mentioning their losers.
4. A new paradigm will be born.
Since the year 2000, we've had a few particularly dangerous and costly new paradigms:
- A company's cash flow no longer matters. (The internet stock bubble.)
- Real estate can never decline. (The real estate bubble.)
- Capitalism is dead. (The real estate and financial crisis of 2008-09.)
Nature abhors a vacuum, and the nature of investing is no different. I predict it won't be long before another patently ridiculous paradigm rushes in to fill the void. That new paradigm will ultimately prove to be false, of course. And with the benefit of hindsight and investing amnesia, we'll marvel at everyone else's silliness. I predict that whatever it is, investors will fall for it.
5. You will be pitched something with high returns and low risk.
I predict the opportunity pitched will be open to only a select few, and you may even need to make a decision that day. I predict you will want to buy it. However, if you first ask yourself why they need to pay someone to pitch it to you as a small investor, rather than being snapped up by large investors or institutions, then you will save yourself a lot of buyer's remorse and heartburn from the likely financial loss.
Why we love predictions
Behavioral scientists have discovered that what's at the core of the dislike human beings have for randomness is an overwhelming desire to believe we are in control. "Knowing" that the Standard & Poor's 500 will close at 2,563 next year gives investors that feeling of control, even though it gets us into the stock market after it has surged.
Though my predictions may not be as emotionally satisfying as most others, I stand by them because they are based in reality and are likely to be more financially rewarding.
Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
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