It is that time of the year when the business media rolls out predictions about the year ahead. It is understandable why they do it. It attracts eyeballs, as it can make for interesting reading. People like to have some level of confidence about what the future holds -- even when it is just hope.
Predictions are seldom objective. They are colored by our hopes and dream. The pre-existing political and market biases of the fortune tellers is always quite clear, despite their claims of objectivity when discerning the future.
It might be entertaining to predict what will happen in the market in the year ahead, but it is a mistake to try to incorporate those guesses into your market approach. Not only is it impossible to accurately predict the future, but the ability to predict the future is greatly overrated as a component of investing and trading success. It would be nice to know what is going to happen, but we don't have to know in order to produce profits.
It would be fantastic if we could just predict what will happen, invest our money and then wait for the big payoff. Investors do get lucky frequently enough to think that actually is a good approach, but relying on our ability to predict the future is a sure way to do poorly.
What is worse is that when you make predictions of this type, it creates a bias. Everyone has a desire to be correct -- and when you predict something, you will start to engage in data mining and try to find ways to be correct that will corrupt your objectivity.
The biggest investing mistake that many investors made in 2017 was predicting that Donald Trump would be the catalyst for a major market drop. That bias caused many to stay underinvested as they anticipated some great disaster. Their bias and their predictions cost them -- and many of them could never set it aside.
What I know about 2018 is that the market will have rallies and pullbacks. There was an unusual lack of pullbacks in 2017, which suggests we are due, but that is simply something to be aware of, not to act upon.
I believe superior trading and investing is a function of reacting effectively rather than predicting the future. Yes, it is fun and gives us confidence to predict what will lie ahead, but the history of prediction tells us that it doesn't work. When they do get it right, it's luck -- not superior insight.
I will predict one thing: 2018 will be a great year for disciplined traders that stay focused on price action. It doesn't much matter what the headlines might be.