My Dad likes to tell a story about when he was a wee lad, back in the 1890s. My Dad is old.
No, it was the 1960s. He had a school project where he was supposed to make a prediction for the future. Apparently he had just finished watching an episode of The Jetsons, because his idea was a little out there. He predicted that his classmates would live to see a day where we could have phone conversations over video.
The class laughed at him, but in his defense, the prediction has come true. No word on whether he tracked down his classmates on Facebook and told them to suck it, but if he didn’t than he’s a better man than I. What? Holding a grudge is fun.
A few of you reading this know my Dad, but 99% of you have never met him. If you’ve been around for a while you might remember the time he traded in his crapbox car for a nice one, and the important lesson it teaches you about compound interest. But when it comes to technology, he holds no particular insights.
So when he made that guess back in the 1960s, it was just some little kid’s imagination running wild about what the world might be capable of one day. The fact he got it right doesn’t make him smart, and it sure doesn’t make him a technology guru. Plain and simple, he got lucky.
What does this have to do with your finances? Plenty.
On Friday, I cracked a joke about my terrible advice to lock into a 10-year mortgage, which I suggested back in 2013. I thought interest rates were about as low as they were going to go, and that in 5 years a 3.89% rate was going to be looking pretty good.
This prompted the following response from one of my readers.
This isn’t to call out AmAnda, because she’s absolutely right. I made a bad call on the direction of interest rates. Like the rest of the market, I believed that rates could really only go up, because we were so close to zero that math dictated it. In many European countries these days, banks are offering negative interest rates to borrowers. Nelson of 2013 would have put the chances of that happening at pretty close to zero.
When oil hit $110 per barrel in the middle of the summer, how many people were calling a top in the market, telling investors to get out? I like to think I pay a decent amount of attention to these things, and I don’t recall reading anything which predicted such a decline in crude.
Remember how I predicted a bubble in Canadian housing? I still think the bubble is there, but I’ve been wrong on that prediction for well over a year now, and noted housing bears have been calling for a collapse in Canada since 2008-09.
At the risk of sounding like that guy, I’m pretty smart when it comes to this kind of stuff. I’ve been following it for years, and I can just about guarantee that I read more when it comes to investing, interest rates, and so on than you do. My job is to absorb information and regurgitate it. If I can’t consistently get it right, what chance does the guy who checks 4 blogs once a week have?
Which is why neither of us should try. Hell, even the experts shouldn’t try.
Remember how bonds couldn’t go any lower? In 2014, the largest Canadian bond index fund (TSX:XBB) returned about 8.5% including the distributions. That lagged the TSX Composite, but only buy a couple percent. At the end of 2013 until now, bonds would have been a fine choice.
People have been saying the U.S. stock market has been overvalued for years now. It keeps on trucking.
How many people were saying gold was in a bubble at the end of 2011? Or that the U.S. housing market was crazy overvalued back in 2007? There were a few, but even if someone got the first bet right, chances are they messed up all the subsequent ones.
What’s the solution to this problem for the common folk? Stick to the basics.
Variable rate mortgages have almost exclusively been cheaper than the fixed rate variety over the last 50 years. Stick with that, unless worrying about interest rates actually keeps you up at night. If you’re willing to pay extra, go with fixed. But whatever you do, don’t go with a fixed rate because you think rates are going up, or vise-versa.
It’s the same thing with investing. You might think stock markets are overvalued (an opinion I’d share, especially in the U.S.), but it’s silly to try and predict it. Figure out what your asset allocation is and stick with it. If you’re a value investor like me, don’t worry about macro issues. Just keep working on finding undervalued stocks and go with it. You can’t predict macro issues anyway, so don’t even try.
Bottom line? I have a terrible record when it comes to predicting interest rates, the direction of the overall stock market, and all sorts of other macro issues. So do most people. Stop basing decisions on these factors and ignore the noise.