Let’s say your friend came back from the future and shared a glimpse of stock market performance. He said that 3 months from now the stock market will be lower. He didn’t elaborate but hearing that the market would be lower got you concerned.
But then he said, “you don’t need to worry because 3 years from now the market will be up from its current level.” You now have two pieces of information pertaining to future market performance that no one else has. Even with this information, there is still a lot you don’t know.
You don’t know how far the market might go down or up. You don’t know what catalysts would cause the markets to go down and then up. And you don’t know how long each market move would last.
Your Plan of Response
Given this information, what would you do? Would you try time the market by actively selling and buying when you think it would best? Or would you choose to stay the course, as if you didn’t have this information?
This hypothetical example is typical in the markets because they are constantly fluctuating. And it demonstrates that even when you have some information, there is still a lot of information you don’t have. Investors often make unwise decisions when they believe the information they have is the only information that matters. Sometimes we just don’t know what we don’t know.
My Two Cents
This is why my advice is always to ignore the predictions, headlines, gut feelings, and remain disciplined to your plan. I know it isn’t easy, but I know it the most responsible course of action in a market where the unknowns often exceed the information we know.
© The Behavioral Finance Network
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