WISE Money – Stubborn Bulls and Stubborn Bears are Both Wrong

Q: I have one friend who’s always overly optimistic about the stock market and another who’s always predicting a crash. Whom should I believe?

A: Neither. Some people—perma‐bulls—are always predicting that the stock market will go up, and others—perma‐bears—are always predicting that it will go down. Both groups are misguided because, as history shows, the market randomly and unpredictably goes up and down. This historical reality doesn’t stop stubborn bulls and bears from fixating on events in ways that are consistent with their views.

For example, habitual bulls currently find justification for their upward bias in historically low interest rates. And when stocks go down, they scream “buying opportunity!” Habitual bears support their views by citing the erosion of public trust in the financial system, crippling government debt and market patterns that might resemble pre‐crash charts from 1929 or 1987.

Beware of confirmation bias

Followers of both camps are guilty of confirmation bias—looking only for evidence that supports their views while turning a blind eye to evidence that doesn’t. The folly is that each camp often finds justification in the same events or trends. If oil prices go up, bulls say that’s good because the economy must be doing better, while bears warn that consumers will have less money to spend on other items.

If oil prices go down, bulls say consumers are benefiting, while bears see this as a sign of a worsening economy. For bulls, a stagnant economy means market opportunity because investor expectations are low. Yet bears see this as a negative. When economic growth ticks up, bulls say company profits will increase, while bears say the stock market and the economy are two different things.

Of course, many investors aren’t members of either camp. They consider the evidence on both sides. Yet making investment decisions based on expectations of market changes, even with a balanced view, is akin to gambling because, as evidence clearly shows, no one knows when the markets will rise or fall. Historically, the market has gone up significantly more than down, which is why the only prudent strategy is to ignore self‐serving fortune tellers. Attempting to time investments based on such worthless predictions isn’t wise investing. As academic research shows, this has devastated many investors, including so‐called experts.

Think and invest long term

A preferable, time‐tested strategy is to invest in such a way that you benefit from the long‐term rise of stock markets and stay invested during normal, unpredictable declines. For the long‐ term investor, the real risk isn’t being in the market during declines but being out of the market and missing out on long‐term gains.

Owning a globally diversified portfolio—which includes safe, stable investments such as short‐ term government bonds—can lower your portfolio’s risk because these bonds serve as an airbag to help you absorb market hits.

Much of the concern over what the markets will do next is part and parcel of active management mentality, by which people speculate by guessing which investments to buy or sell. They claim this is “strategic research.” Yet academic evidence clearly shows that this produces results inferior to those of passive management, by which investors don’t bet on individual stocks but invest in generic index funds or asset class funds, which have far lower expenses than actively managed investments. When you have this type of passive portfolio, diversified across many types of investments, you can ignore the empty, dangerous rhetoric of those who would lead you to ruin with their “insights.”

This way, you don’t have to worry about what the stock market is going to do in the short term and can enjoy the returns of the long term.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.

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