In 2013, Wall Street Journal columnist Jason Zvigo regretted The challenges of providing consistent advice seem refreshing:
“My job is to write the same thing 50 to 100 times a year in such a way that neither my editors nor my readers will ever think that I am repeating myself. This is because good advice rarely changes, While the markets are constantly changing. Pander’s temptation is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Unlike Mr. Zweig, I won’t try to make my prediction for 2022 any different from what I’ve made for 2020 and 2021: In 2022, the US stock market will probably be up, but it could be down. I trust my prediction because it reflects what has happened historically – the stock market has appreciated by about two out of every three years, no matter what happened before – see the chart.
Investing in the stock market is like tossing a weighted coin which most of the time comes heads and sometimes tails. This is as specific as we can be about market returns, which is unsatisfactory because it makes us feel uncertain about the future.
The biggest misconceptions about investing
One of the biggest misconceptions about successful investing is that you need to know what will happen in the future. Sure, a crystal ball would be great, but nobody has one. Study after study has shown that expert stock market predictions are useless. Jeff Sommer, Writing in the New York Times
Using market predictions to inform investment decisions is like preparing your boat to go to sea based on the weather forecast that someone made. Sooner or later, you won’t be prepared for a storm or weighed down with life rafts and safety gear when you can sail in fair weather. It is better to prepare your boat well for both storms and pleasant weather. Such is the case with investments. Since we cannot predict what the market will do, we must be well prepared for years of volatility.
but things are crazy now
But surely you say, the stock market, private equity and venture capital are on a tear, valuations are high, and most investors are caught in the speculative frenzy? Those things are true, but a bear market is not guaranteed in 2022 because the market is expensive in 2021. Alan Greenspan warned investors about “irrational enthusiasm” in 1996. He was eventually proven correct, but the S&P 500 more than doubled amid his warnings. and March 2000, and the tech-laden Nasdaq
One truth of investing is that the market often continues its trajectory both up and down for longer than anticipated. There is no reliable signal when the market is hitting an inflection point. Even the Schiller PE, the most predictable metric of future stock market returns, explains only 40% of their variation over a ten-year period and provides no reliable guidance for short-term returns.
Of course, the great stock market returns we’ve experienced in recent years can’t continue forever. At some point, we will suffer a bear market. It may start tomorrow or years from now; We just can’t know. However, as I have written before, It’s okay to invest near the top of the market.
what to do instead
Recognizing that we cannot know what the market will do next year with any specificity is the key to successful investing. Instead of relying on flawed predictions, enter 2022 with the belief that no one knows what will happen. Try not to take the time to capitalize on the market, but don’t follow the crowd and pile into the investing trend of the day.
Great investors ignore the noise and focus on their long-term goals. Stick with your investment strategy by taking advantage of your high-flyers and adding investments such as international stocks and non-correlated assets that may have lagged. And keep a margin of safety in cash and high-quality bonds so that when the next recession hits, you have money to rebalance in stocks.
Lastly, resist the temptation to click on market forecasts.