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January 5, 2014

Stock market difficult to predict, even for experts

(Continued)

First, the financial payoff for those who are lucky enough to guess correctly is enormous. Investment gurus provide the marketing hype for their organizations. Guess right and the advertising and promotional machine cranks up. Guest spots on CNBC, articles in the financial press, and promotional material touting superior investment returns has the powerful affect of attracting a flood of new investors and millions of dollars in assets to the organization. Guess wrong and they defend their positions with a cleverly worded rationale and complicated charts. Thus, there is no downside to making a prediction so long as it is remotely plausible.

Second, despite their questionable value, these predictions remain popular with a less experienced investing audience. For most Americans, especially those nearing retirement or already retired, their wealth is materially affected by the rise and fall of stock prices. The stock market represents a complex system that is affected by multiple factors, including expectations of future economic and geopolitical conditions as well as random events.

Studies in behavioral finance suggest that when making decisions in the face of such uncertainty, people tend to rely on those who are seemingly able to offer predictability in otherwise unpredictable situations. There are plenty of investment professionals who are happy to offer that predictability. Smart investors will recognize their limitations.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

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