Wall Street's Dirty Secret: Nobody Really Knows

(MoneyWatch)  Yesterday, my physical therapist asked me, "So where's the market going?" I grinned and provided my usual response of "it could go up, it could go down and maybe it'll go sideways." With five pounds of ice on my shoulder, I started to think about the question more.

Of course we all want to know what's going to happen next, but you can drive yourself crazy reading predictions from even the best and brightest out there. Today on MoneyWatch.com, we have a great example of three incredibly bright people who all draw from the same information and come to different conclusions.

James Paulsen argues for the bulls, citing the improvement in economic data and a better-than-expected second quarter earnings season. David Winters represents a more dour view of where both the economy and markets are presently, noting that there has yet to be any really good news. We also have Diane Swonk, the cautious optimist, who splits the difference between Paulsen and Winters.

Three smart people, three cogent arguments, but where does that leave you? My colleague Larry Swedroe suggests that you press the mute button and avoid listening to most of this stuff. He cites a lot of data to support that recommendation, but let me boil it down to what anyone in the business knows: NOBODY REALLY KNOWS WHAT'S GOING TO HAPPEN IN THE SHORT RUN! Sure, there'll be some who get it right now and then, but the most seasoned professionals will admit that they have been humbled and even surprised at various points in their careers.

So here's what you need to accept: investing is one-half science (that's the analysis and data collection) and one-half art (that's the emotional part that can lead you astray). My mentor on the Commodities Exchange in New York (also known as my "Investment Yoda") was fond of saying, "If you get the science part right, there's only a 50% chance of screwing up!"


To reduce your odds of screwing up, stick to your financial game plan; create a sensible allocation that will prevent you from panicking at the bottom or being gluttonous at the top; adjust the plan and the allocation accordingly as your life changes; and be disciplined about monitoring your progress. As Yoda would say, "Remember, a Jedi's strength flows from the Force. But beware. Anger, fear, aggression."

Image by Flickr User yapsnaps, CC 2.0