{"id":18933,"date":"2025-01-09T15:25:17","date_gmt":"2025-01-09T15:25:17","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/the-oldest-bad-joke-on-wall-street\/"},"modified":"2025-01-09T15:25:17","modified_gmt":"2025-01-09T15:25:17","slug":"the-oldest-bad-joke-on-wall-street","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=18933","title":{"rendered":"The Oldest Bad Joke on Wall Street"},"content":{"rendered":"


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Have you heard this year\u2019s version of Wall Street\u2019s favorite joke? <\/p>\n

\u201cWe\u2019re going to predict how the stock market does this year!<\/em>\u201c<\/p>\n

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To the outsider, this probably seems like a perfectly reasonable thing to do. Let\u2019s ask the venerable Wall Street firms for their best opinion. <\/em><\/p>\n

I\u2019ll see your Wall Street firms and raise you one engineer-turned-blogger\/podcaster-turned-financial-planner. <\/p>\n

1-year stock predictions are pointless<\/strong>. We\u2019d all be better off ignoring them. <\/p>\n

Risk, Reward, Timelines, and More<\/h2>\n

Time and again, I want to ensure every long-term investor understands the relationship between risk and reward.<\/p>\n

A guarantee \u2013 a.k.a. zero risk<\/em> \u2013 comes with the least potential reward. In tangible terms, that \u201czero risk asset\u201d is a short-duration US treasury note or a high-yield bank account. <\/p>\n

As we seek out more reward, we must take on more risk. For many of us, stocks eventually enter that conversation. Stocks promise more expected reward, but come with far more uncertainty. Even a highly diversified stock portfolio is far more volatile than a simple bond.**<\/p>\n

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**Now, \u201crisk\u201d<\/em> and \u201cvolatility\u201d are not <\/strong>the same. But they\u2019re cousins. This fact is a long-standing schism<\/a> in the investing world. We won\u2019t solve that schism here on The Best Interest. <\/em><\/p>\n

This is why timelines<\/strong> matter so much in your financial plan and why I harp on them.<\/a> Your unique financial goals have a timeline associated with them. That timeline informs your investing period. Different asset classes \u2013 with different risk profiles \u2013 <\/em>are appropriate or inappropriate for different investing periods. Further reading: the RRTTLLU framework. <\/a><\/em><\/p>\n

This is all a preamble to why these 2025 stock market predictions are so stupid.<\/em> A one-year performance prediction is antithetical to the proposition of stock investing. Stocks are not a 1-year asset! Not even close. <\/em><\/p>\n

It\u2019s as if we had an annual chess championship for dogs, where the announcers tried to convince you that German Shepherds are particularly sharp at playing the Berlin Defense. Perhaps a few people would fall for it. But most of us know the truth: dogs can\u2019t play chess. It\u2019s the nature of the beast. No matter how much training we give them or how many years we hold the competition, you can\u2019t alter that nature. <\/p>\n

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Similarly, nobody can skillfully, repeatedly make a 1-year prediction about the stock market. <\/p>\n

If they could<\/em> make that 1-year prediction, then stocks would suddenly be a reasonable 1-year investment. Such predictability would be akin to a performance guarantee \u2013 or, in other words, a dramatic decrease in investing risk. And with that decrease in risk would come a dramatic reduction in expected return. <\/p>\n

You see? The reason why we use stocks for our long-term financial goals (they are a long-term asset<\/em>) is the same reason why 1-year predictions are silly. It\u2019s the nature of the beast!<\/strong><\/p>\n

Yet here we are again, with the biggest names on Wall Street exhaling the vape from their crystal balls. <\/p>\n

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All 16 of these groups predict the S&P 500 will finish up <\/strong>on the year. Their predictions range from +7% to +19%. This is a remarkably tight<\/em> range of forecasts, considering 1) the stock market loses value in roughly 25% of all years, and 2) it grows by >20% in roughly 30% of all years. Those two outcomes account for ~55% of all years! Yet none<\/em> of these prophets believe either of those two outcomes will occur this year? <\/p>\n

If we had 16 independent<\/span> thinkers, surely<\/em> at least a few would have picked one of the outcomes that occur 55% of the time \u2013 right? It\u2019s literally<\/em> <\/strong>more improbable than if all 16 of them flipped a coin that landed heads\u2026which is about 1-in-150000.<\/p>\n

Therefore, the conclusion is that these are not independent thinkers. This is herd mentality. I\u2019m not the first to point this out. Just think about it. <\/p>\n