2021 OutlookJan 11, 2021
Your Outlook for 2021
Many of the events of 2020 have been out of our control. From bushfires, to floods, to a global pandemic, we have faced challenges across the physical, emotional and financial aspects of our lives. As we welcome 2021, we will start to notice the usual influx of financial commentary and predictions about how the new year is going to play out.
Television and radio must fill 24 hours a day with news and current affairs; this mostly involves empty-headed nonsense. Print media has column-inch demands to satisfy. Online and social media may be the most demanding of all, as they require an infinite, constant supply of new, and often meaningless, content.
So, what do we think the 2021 financial outlook is going to be? In all honesty, I don’t know.
I’m not being intellectually lazy. In fact, my view is quite the opposite. When someone states that they can accurately predict the future based on the skill and expertise that only they possess, it is often proven to be false.
A case in point is the CIO for Hostplus stating in January last year that investors should ‘Borrow and invest with your ears pinned back’. In fairness, he wouldn’t have known that a virus outbreak would wreak havoc on the global economy. But that’s the point.
Hearing financial predictions for the future isn’t a new issue. During recent years, the internet has helped us keep track of some really bad calls. A few of these were explored in The Intelligencer’s report, ‘2008 Investment Guides are Hilarious’.
Looking back to 2008, we see Jon Birger, the senior writer for Fortune’s Investors Guide 2008, state ‘Question: What do you call it when an $8 billion asset write-down translates into a $30 billion loss in market cap? Answer: An overreaction … Smart investors should buy [Merrill Lynch] stock before everyone else comes to their senses.’
What actually occurred was that Merrill agreed to sell itself Bank of America to avoid a Lehman-like flameout, but Merrill’s shares plummeted a frightening 77 percent. There are many other cases where ‘expert’ views have not panned out the way they expected.
The Dunning–Kruger effect
In the field of psychology, the Dunning–Kruger effect is a cognitive bias in which people overestimate their ability to carry out a task. Related to the cognitive bias of ‘illusory superiority’, this stems from a person’s inability to recognize their lack of ability or expertise. Without highly tuned self-awareness, people cannot objectively evaluate their own levels of competence or incompetence.
‘Economists, market strategists and analysts alike suffer from an affinity for making big, frequently bold — and most often, wrong — pronouncements about what is to come. This has a pernicious impact on investors who allow this guesswork to infiltrate their thinking, never for the better.’ - Barry Ritholtz, The Washington Post, January 16, 2015.
As financial advisers, we need to be acutely aware of our skill levels and expertise when making any recommendations for the future.
3 Simple Strategies to Deal with Financial Uncertainty
2020 definitely threw many predictions out the window. What’s important to take away from this experience is that there are a variety of different circumstances which may impact our financial and personal wellbeing.
Humans have a basic desire to maintain a sense of control. As a result, we feel that being able to predict a potential outcome gives us a greater chance to regulate our environment.
In the financial world, however, things may not be as predictable as we may hope. It is this uncertainty that adds to our stress and anxiety about what the future holds.
Here are three simple strategies to help deal with financial uncertainty (and all the predictions that will be filling the media in coming weeks):
- Create and maintain a well-thought out financial plan – one that is not dependent on correctly ‘guessing’ what will happen in the future.
- Aim to have a broad asset allocation that seeks to diversify into various asset classes which perform differently in diverse circumstances.
- Reduce the useless and distracting noise in your media diet.
All at Wiseman wish you a happy and prosperous 2021. If you are feeling any uncertainty, or would simply like to review your current financial plan, please get in touch with us.