5 Financial Predictions for 2011

Last Updated Dec 14, 2010 10:50 PM EST

A couple of days ago, I got a call from a major newspaper asking me for my predictions for stock market performance in 2011. As much as I love the publicity, I responded that I didn't have the faintest idea what was in store for the stock market in 2011, but at least was one of the few who actually knew he didn't know.

I got to thinking that it might be a little unsettling for my readers that I had no assurances to offer, so I decided I'd write about a few predictions I could make.

#1: Investors will behave badly
While I don't know if the market will go up or down, I do know that individual investors and investment advisors will do the wrong thing at the wrong time. If stocks go up, they will buy. If stocks decline, they will sell. If something's hot, they'll chase it, and if something's not, they'll avoid it. Human nature is every bit as predictable as the stock market is not. I predict it will be a very bad idea to invest with your emotions.

#2: The word "fiduciary" will be an ever bigger hit
I predict the word "fiduciary" will be used more often than a rest stop bathroom, by the SEC, FINRA, and even the CFP Board. Yet they will allow the industry to mislead individual investors every bit as much as they have done in the past. The lessons from the financial crisis were not enough to change the culture of the regulators. Investors must become their own advocate, and must understand any investment before signing on the dotted line. I predict we will, once again, not be able to count on this so called fiduciary standard.

#3: The insurance industry will prosper
Just the other day, while my 13 year old son and I were out for some holiday shopping, I was listening in my car to an infomercial that promised a minimum of an eight percent annual return with no risk. Since I called dibs on the radio, my son was listening too, and asking questions. And what clearly appeared to be an outright lie to him will, tragically, be believed by millions as an alternative for their bad behavior in prediction number one above. The equity indexed annuity is the ultimate product that takes advantage of all of our behavioral mistakes. I predict they will sell like hotcakes, but advise to quit looking for market returns without risk.

#4: "Dull" investing will work
I predict that keeping expenses and emotions at bay will be as effective in 2011 as it has been in the past. Buying the entire stock and bond markets with simple low cost index funds continues to work and continues to beat an active approach. The necessity of rebalancing will feel as awful as it always does, but it remains the one sure way of going against the herd. I predict that dull will be the new black.

#5 A new paradigm will be invented
So far this decade, we've had a few paradigms:
  • Cash flow no longer matters (internet bubble)
  • Real estate can never decline (real estate bubble)
  • Capitalism is dead (black swan market plunge)
Nature abhors a vacuum, and the nature of investing is no different. It won't be long before another patently ridiculous paradigm rushes in to fill the void and, not long after that, will ultimately prove to be false. With the benefit of hindsight, we'll marvel at the silliness of others, also having the benefit of investing amnesia. I predict that whatever it is, investors will fall for it.

Why we love predictions
Behavioral scientists have discovered that at the core of the dislike human beings have for randomness, is an overwhelming desire to believe we are in control. "Knowing" that the S&P 500 will close at 1,450 next year gives investors that feeling of control, even though it gets us into the stock market after it has doubled.

So there are my predictions. They may not be as emotionally satisfying as most others, but I stand by them because they are likely to be more financially rewarding.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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