The difference between preparation and prediction, and why it matters to investors
19th January 2024
Addressing a room full of seasoned investors at an annual shareholder meeting back in 2022, multi-billionaire investor Warren Buffett said bluntly, “We haven’t the faintest idea what the stock market is going to do when it opens on Monday.”
It might sound surprising to hear one of the world’s most successful investors tell a room full of people that he is clueless about what might happen next. Yet this could be the most valuable pearl of wisdom Buffett could offer to investors – there simply is no predicting the stock market.
If we can’t know what will happen next, you might wonder why you should bother investing at all. After all, the level of instability the stock market is subject to might cause you some financial stress.
Nevertheless, investing makes up an important part of most financial plans. As Schroders reports, invested assets usually help individuals grow their wealth in line with, or exceeding, the rate of inflation – meaning your money may go further over the long term.
So, if you want to keep investing but can’t predict the stock market, how can you adequately prepare your wealth for market fluctuations and downturns?
Keep reading to find out why preparation trumps prediction when it comes to investing.
Figuring out your appetite for risk helps to manage your investment expectations
If you are new to investing, the word “risk” may have purely negative connotations.
Most investments carry some risk of capital loss – and if you’re worried about the value of your investments going down in future, you could spend hours trying to work out how the stock market will move in order to avoid it. Yet exposing your portfolio to a small amount of risk could lead to it making greater gains later on, but this may involve withstanding short-term dips in its value.
While there is no predicting what might happen to the value of your investments in future, one way to prepare for any short-term losses is to understand your appetite for risk. This is highly personal to you – it depends on:
- Your overall levels of financial confidence or anxiety, and how you apply these to your investment portfolio
- The portion of your wealth you are investing
- Your wider financial circumstances.
Company shares, for instance, may be considered higher-risk investments because their value is subject to several factors, like inflation, company profits, and personnel changes. On the other hand, Government bonds might be seen as lower-risk as they are a fixed-income asset.
Generally, a higher-risk portfolio might see greater returns in the long run, whereas a lower-risk portfolio may see fewer gains over time – although this is not always the case.
Talking to a Financial Planner about your appetite for risk could help you feel more prepared for any fluctuations in your portfolio’s value, and may prevent you from trying to time the market perfectly.
Diversification could shield your portfolio from extreme volatility
Another way to prepare for unexpected market conditions instead of trying to predict them is to diversify your portfolio.
Simply put, this means the opposite of putting all your eggs in one basket. Rather than buying many units of one asset, such as shares, diversification means spreading your wealth over several types of investments.
This could include:
- Geographically diversifying your portfolio by purchasing holdings from various regions
- Exploring different asset classes, such as equities, commodities, bonds, and real estate
- Spreading your investments across several sectors and industries.
If one asset class receives a shock – for instance, bond values dipped significantly between 2020 and 2022 – the rest of your portfolio may hold firm, protecting your wealth from extreme highs and lows.
As a result, your portfolio’s returns could remain steadier over the years, and may make you feel calmer too.
Knowing your investment time frame means you may stay calm during market volatility
Investing over the short term can often lead to disappointment, which is why we recommend investing over a minimum of five years.
Beyond this minimum point, though, the time frame you choose may depend on your future plans.
For instance, if you are retiring in the next 10 years and wish to liquidate some of your portfolio to fund your life after work, your strategy may be entirely different to someone investing over 30 years.
Importantly, figuring out your personal investment timeline may be crucial when it comes to preparing for the unexpected. Instead of wasting your time trying to predict how markets will move, focusing on your timeline could be far more constructive.
For example, if you plan to cash in some shares to help your child onto the property ladder in 10 years’ time, any short-term volatility that happens today is less likely to affect these plans.
Ultimately, knowing your timeline may allow you to:
- Stay calm when short-term dips happen
- Keep investing your wealth confidently over the years
- Expose your wealth to an appropriate amount of risk for you
- Stop trying to predict the future of the market unnecessarily
- Work towards your long-term goals.
If you are unsure of your investment timeline, a Financial Planner can help you to assess this.
Get in touch
We don’t have a magic crystal ball that will tell you the future of the stock market – but we can help ensure that your portfolio is robust, suits your goals, and is designed to grow over your personal time frame.
To speak to a Financial Planner, email us at firstname.lastname@example.org, or call 01904 661140.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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