Past Experience Does Not Predict Future Market Behavior

A few summers ago, I went deep-sea fishing for the first time. I boarded a small boat with a group of three seasoned fisherman and my husband Joe, who had been deep sea fishing before.

The captain and the deckhand welcomed us. After we set out, a storm unexpectedly rolled in. The deckhand later said the waves were the worst he’d seen all season. Joe and two others, who previously stated they never get seasick, were immediately seasick. Meanwhile, I was feeling great, and the third man from the other group was calmly eating a foot-long sub out of a cooler that was also storing fish.

As a first-timer, you may have assumed that I would have struggled the most (a prediction I would have made as well), but surprisingly, I may have enjoyed the day the most. It’s a toss-up between me and the foot-long-sub-fisherman.

This experience exemplifies how we see situations through a filter of our past experiences and expectations. It often happens through subconscious categorization, which frequently helps us as humans. But it also means we can easily be misled by patterns we see.

PAST EXPERIENCE DOES NOT PREDICT MARKET BEHAVIOR

This is especially true in investing. One of the worst mistakes an investor can make is to rely on memory or past experiences to predict market behavior. The market doesn’t follow predictable patterns just because we want it to. When we impose our own narrative, we may see patterns that are not there, leading to decisions that are not based on solid evidence.

Predictions from patterns make sense, but the problem is the market is not rational. This is why diversification and a disciplined and unemotional investment philosophy are so important.

Don’t let your memory and rationale trick you into seeing patterns that are not there. Instead, focus on the facts and continue working to align your finances with what is most important to you.

And in the spirit of January, let us know something new you’d like to challenge yourself to try this year. Don’t hold back; you might surprise yourself and enjoy it more than those with experience!

Hannah Whatley, CFP®, AIF® is an Advisor with Rather & Kittrell.