Early on in my career, clients would ask where I thought the market was headed, and I felt obliged to answer these questions on market movements. Valuations were high, I would explain, or I might point to the most obvious risks in China, or with U.S. interest rates or wherever. Fortunately, I never went so far as to make substantive changes to portfolios based on some gut feeling as to where things were headed, but I didn’t respond as often as I should have with a simple “I don’t know.”

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We focus a great deal on the short term, trying to predict what will happen and what that will mean for market movements. That focus drives many, if not most of the headlines in the financial press, and yet evidence is clear that few investors can outperform the markets. Instead of spending a good deal of time and energy trying to outguess the markets, investors would very likely fare better focusing on the following:

  • Identifying what is certain – although market returns are uncertain, there are plenty of key financial issues that are certain or nearly so. What your tax rate will be, much of your budget and the tax characteristics of investments are all examples. Identifying and understanding those certainties can help drive better investment and financial decisions.
  • Tailoring your portfolio to your needs – your investments should reflect your specific situation. Once you’ve got an idea of your target return, how much cash you might require from the portfolio, how much risk you can accept and your tax situation, you can build a portfolio to meet those needs. If you’re like most investors, you’ll have to accept some risk because if you don’t, it’s highly likely you won’t achieve your target return over the long-term (unless that target is very, very low).
  • Thinking through what-ifs – think through what might happen in terms of both the market and your life. On the market side, if a bear market is apt to keep you from meeting your goals, is there something you can change such as how you’re invested or how much you’ve set aside to cover your needs? As for life changes, are there things that are apt to happen or things that might happen that would impact how you should be invested?
  • Checking on your progress periodically – most of us invest to achieve a financial goal or goals. Check in from time-to-time to confirm you’re making progress towards your goals. I touched on this idea in this post I wrote about setting up a financial calendar.
  • Making better decisions – do what you can to systematically improve your decision making. Many investors keep a journal tracking the decisions they have made so they can review what worked and what didn’t. Understand cognitive biases so you’re aware of your blind spots, and explore mental models to see if they might be useful.

I still get questions about where the market is headed, but fewer than I did in the initial years. Our clients know that I’ll caveat any answer I give about market movements with “I don’t think you can predict that”, and we’ll spend the balance of the meeting focused on many of the issues outlined above.