To manage our money better, often we don’t got to know more. Instead, we’d like to unlearn what we expect we already know.
Here are just a few of the items that, at various points in my 35-year investing career, I’ve thought I’ve known:
Which fund managers will outperform.
Which way the economy is headed.
What’s next for interest rates and share prices.
Whether the general stock exchange is overvalued or not.
Which individual stocks will beat the market.
Which stock exchange sectors and national stock markets will fare best.
Fortunately, this “knowledge” never greatly influenced my investment strategy. Still, I even have little doubt that my portfolio’s performance would are better if I hadn’t imagined that I knew these things—and I certainly wouldn’t have wasted such a lot time and psychic energy .
Why can we think we all know such things? It’s partly because Wall Street and therefore the financial media talk endlessly about these issues. The financial media must fill airtime, websites and printed pages. Meanwhile, Wall Street wants to convince you that you simply know something about the longer term , so you actively manage your portfolio and thereby fatten the Street’s coffers.
But not all the blame belongs to others. Our belief that we’ve knowledge also partly stems from the way we’re wired. That wiring leaves us susceptible to a number of behavioral mistakes, including extrapolation, overconfidence and recency bias, which together conspire to convince us that we all know what the longer term will bring.
The problem: once we think we all know something, we’re inclined to influence that knowledge. within the financial markets, action nearly always triggers investment costs and maybe big tax bills. If we mess with our basic mixture of stocks and conservative investments, we may miss an enormous market move—and any time we prefer to reduce our overall stock exposure, we also lower our portfolio’s expected long-run return. And if our purported knowledge causes us to form narrow investment bets, we risk a permanent loss of capital, as we back stocks and market sectors that would potentially plunge—and never recover .
Even if we put our hands on our heart and that we swear we aren’t inclined to forecast, predictions often creep into our behavior. We hold off investing because we sense share prices could fall. We tilt toward U.S. stocks because we expect that they’ll always outperform foreign markets. rather than prudently diversifying, we hang on to the employer shares we’re granted, because we will see that the corporate is prospering and that we believe the stock price doesn’t fully reflect that.
What if we thought harder about such issues? regardless of what proportion we analyze individual stocks, different market sectors and therefore the overall market, there’s no evidence we’ll come up with a far better forecast. Instead, our greatest bet is to not forecast. we’d like to unknow this stuff that we expect we all know , and instead specialise in facets of investing where we’ve some control and where we truly can add value. We’re talking here about the quantity of portfolio risk we take, the investment costs we incur and therefore the taxes we pay.
There also are other areas of our financial life where diligence and more thought pays handsome dividends. we will substantially improve our financial life by deciding which debts to pay off first, what kind of home it makes most sense to shop for , when to say Social Security , what insurance we’d like and what estate planning steps we need to take. we will also improve our life by spending more thoughtfully and saving more diligently—and by fixing the diligence needed to vary our own damaging financial behavior.
To be sure, none of this has the seductive pleasure of creating forecasts and imagining we’ll be proven right. But over a lifetime of investing, that pleasure, alas, nearly always carries a steep price tag—and that’s one thing we all got to know.