The Reaction Business vs. the Prediction Business

Lauren Smith |
Here’s what I mean when I say that I’m in the reaction business.

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In previous content, I mentioned that I was not in the prediction business but rather the reaction business. A client emailed me asking for some elaboration, so let’s talk about it today.

Most people think their advisors are out to predict the next Google, Apple, or Microsoft, but that’s not what we do. My crystal ball gets fuzzy right around 8:30 a.m. when the market opens. So if anyone’s telling you with confidence that they’re going to predict the next hot thing, run away from that person as fast as you can.

Of course, that doesn’t mean I’m without an outlook—I have a carefully considered outlook for 2021. I’ve shared it before, but I’ll reiterate it here: I believe this will be a pretty good year both economically and in the stock market. I have my reasons, not the least of which being that the Fed committed to lower interest rates, and spendable dollars (M2) is growing at a rate we’ve never seen before (25% to be exact). I also don’t believe taxes will go up this year; it’s hard to raise them when the country is coming out of a pandemic-induced recession.

My 2021 outlook is not a prediction. A million different things could cause me to alter my outlook. For example, a new vaccine-resistant strain of the virus could emerge, forcing economies to start shutting down all over again (God forbid). You must always be careful when making predictions and investing in that prediction.

"Our greatest strength is our vigilance, not our fortune-telling."

At 2:15 in the video above, I’ve included a chart detailing the growth of assets into bond ETFs and then bond mutual funds. Back in 2008, many people—myself included—used to talk about the impending ‘Great Rotation’ out of bonds into stocks. Why? The yields in bonds had dropped so low that most investors had begun to believe that they’d see better returns from the stock market. A simple glance at this chart is enough to realize that this ‘Great Rotation’ never happened.

That’s why I say that all I can do is react to what’s happening in the market. If we find ourselves in a bad situation and start seeing red flags economically that signal recession, then we take action—but we can’t predict when those red flags will crop up. Our greatest strength is our vigilance, not our fortune-telling.

Hopefully, this helps you to better understand what I mean when I talk about the reaction business versus the prediction business. (Simply put, you should have no business with someone who’s in the prediction business). As always, feel free to reach out to me via phone or email if you have questions about this or any other financial topic.

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