Stop me if this sounds familiar: you pull up the weather app on your phone and it says the chance of rain today is 100% ... and then it doesn't rain at all. Or you look outside and it's actually raining – the raindrops are going tippy-tap on your windows – but your app lists the chance of precipitation at 0%.
Don't get me wrong: I still use my weather app. Knowing the current temperature is useful, as is knowing when to pull the plug on your vacation because of bad weather. But weather patterns are complex, adaptive, reactionary, and chaotic; there are just too many factors involved to accurately predict what will happen next. Weather forecasts are statistical information – the likelihood that current conditions could result in certain outcomes – but statistical odds are not the same as what actually comes to pass.
You know what else is complex, adaptive, reactionary, and chaotic? The global economy, the stock market, and pretty much everything that happens in the news every day.
I received an email recently from a very large & reputable brokerage company inviting me to a market outlook webinar with the headline "What’s in store for the U.S. markets and economy in 2024?" Who wouldn't want to know that information? If you knew what to expect from your investments and the economy at large, you would surely come out ahead! Right?
Imagine this scenario for a moment: you go to your doctor's office for an annual check-up. Your doctor has your medical history pulled up on the computer, looks at the vital signs taken when you arrived (pulse, blood pressure, weight, etc.), turns to you and says, "let me tell you what will happen with your health this year."
Uhhh... what? Even if you are in excellent health, how could your doctor know if you'll be catch a cold or be in a car accident or slip on a banana peel and break your arm? It's ridiculous to think that anyone could make a prediction like that.
It's no different when it comes to forecasting the future of the economy. Each year financial experts roll out new predictions for the next 12 months, even though they got it wrong last year and the year before and the year before that. Was anyone predicting a global pandemic in their "what's ahead for 2020" reports? Who had an insurrection at the U.S. Capitol on their watch list for 2021? Or war in Europe in January 2022? How about a banking industry crisis in early 2023 (which now seems like an afterthought) followed by war in the Middle East and a 24%+ total year gain for the S&P 500?
I'll give you a hint: no one predicted those things. To parpahrase author Morgan Housel: people are great at forecasting the things they understand, but it's the things we don't understand (and therefore can't anticipate) that make the biggest impact.
While the desire for certainty in a chaotic world is undeniable, the truth is that no one – not me, not your favorite newspaper, and certainly not this big brokerage firm – has any idea what to expect in the remaining weeks of the year.
Grab your shovel, grab a bucket, and you'll probably want a pair of gloves: financial forecasts are bullshit.
But that doesn't mean that you can't prepare for an uncertain future. Here's what we know will happen in the future:
There will be another recession.
There will be another stock market crash.
Something bad will require your money at an inconvenient time.
An opportunity will come up which requires your money.
Who knows when and who knows how, but all of those predictions will come true. And thankfully you can prepare for them – even in a chaotic and unpredictable world.
Here are four ways to protect your financial health no matter what the financial forecasts say:
Keep your financial plan simple. The more that things have to go exactly right in order for your plan to work , the less likely it is that your plan will work. Stick to the things you know will help in good times & bad and you'll be ahead of the curve. Need a starting point? Try this: spend a little less than you want to; save a little more than you have been; repay debt a little faster than you need to; invest in things that you can own the rest of your life.
Save enough cash that forecasting doesn't matter. A lot of cash sitting in the bank seems like the worst idea when the stock market is going up and up, and the absolutely smartest idea when markets crash. A good rule of thumb is to keep at least enough money in an interest-bearing account to cover 3-6 months of expenses, but the higher you can make that number, the more rock solid your financial health will be. Think of it this way: if you knew there was going to be a recession, would you feel better knowing you could pay your bills for 3 months or for a whole year? Or even two or three years? And here's the kicker: there will absolutely be a next recession and it will absolutely happen when you don't want it to.
Eliminate debt during the good times so it doesn't hold you back during the bad. Debt lets us improve circumstances in ways that we could not with cash alone. That's a good thing. But when the economy is in the toilet, a large debt balance might be the difference between barely getting by and sleeping soundly at night. Overpaying on your debt accounts each month will not only save you money in the long run, but it also gives you more flex during those times when you can't make extra payments. When money is tight, simply stop overpaying and go back to regularly scheduled payments. (Pro tip: prioritize paying off high interest loans like credit cards before high balance loans like mortgages, and always always pay at least the minimum amount on time.)
Staying invested for a long time beats focusing on this quarter or this year. Investing for the long-term is harder than most people think, which is also why it is profitable. But whether you are 27 or 72, the truth is that your investments will have to last you the rest of your life. Warren Buffett is probably the most famous investor in America. Did you know that about 96% of his net worth came after his mid-60s and over 99% of it came after age 50? Buffett's real investing super power is not that he's great at picking stocks (which he is); it's that his returns have been compounding for around 80 years. Sticking around longer is better than being right every time.
If reading those financial forecasts makes you feel good, then go ahead. Don't be surprised, though, if those predictions don't come true, don't happen when predicted, or you miss out on other opportunities along the way.
For everyone else, there is no need to panic. You can still build solid, stable financial health no matter what the future brings by assuming what we know to be true: we live in a chaotic, complex, and unpredictable world.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify your current strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.