Leading up to the World Cup and even going on now, there are all sorts of experts and forecaters on sports magazines, newspapers, and TV Shows inclusive of the Wall Street Journal who on Friday put out this entire section on about the World Cup and their predictions.
As I have told you before the news is full of experts and pundits telling us what the future holds and the investing world is no different. Research shows that humans are addicted to making predictions. The fact that the future is uncertain is terrifying. Believing that we know what is going to happen next year, next month, next week, even the next minute brings us comfort. Thus we bet on the future direction of the stock markets by employing all sorts of complicated techniques. In addition, we use hindsight to explain the past, as if today’s solutions to yesterday’s problems had been obvious back then. We then extrapolate the past into the future.
But remember getting it right one year does not make a trend. As I have taught my clients in the past, if you want to be a good investor you cannot use prior performance to predict what a fund or stock will perform in the future because there is no correlation at all between past performance and the future.
Just like in soccer and the World Cup, a team who had no chance to pull out of their group can surprise us and make it through to the various other rounds, the same thing will happen in the stock market and that is why we can’t predict stocks and mutual funds from past performance into the future.
Besides if you are a fan of the World Cup and Soccer, you definitely don’t want to base the past performance of the US on past World Cups to what is going to happen in the future.
So remember, stop listening to predictions!
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