The predictable nature of unpredictability

Looking back on November, it's a great time to talk about predictability and certainty. November was a month that saw many of October's predictions, both in markets and U.S. events, prove erroneous. These were not long term predictions: even in the very short term, predictions of the future were wildly wrong.

One of the characteristics of the human mind is that it overweights recent events in importance: it does not have an averaging ability the way a computer or machine does. If the recent past seems stable, we begin to think that the future will be as well. If the recent past has been turbulent, turbulence is what we expect going forward. Our brains are wired to "drive in the rear view mirror" instead of looking out the front windshield.

But in a complex system, and global events are the ultimate complex system, the recent past will not predict where we are headed. The number of variables and uncertainties is *always* enormous.

I looked at the 2012 Berkshire Hathaway annual letter, where Warren Buffett writes:

"Of course the immediate future is uncertain: America has faced the unknown since 1776. It's just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful)."

Here is an example. This chart shows the S&P 500 over a period of roughly 5 years:

Seems ok, right? Going up, going up and down, nothing too unusual. This is the next few months added on:

These are graphs of the 2008 financial crisis. But right before that huge plunge, prognosticators were saying that bad real estate debt was contained to a small group of high risk pools, and the risk had been priced in. Except, in a hugely complex system, variables started to interact in ways no one expected, and a "black swan" (or low probability but large impact) event occurred.

The takeaway for now, as it relates to today: everyone is talking about how uncertain 2017 is looking. But the important thing for you to remember as an investor is that those statements regarding future uncertainty and unpredictability will *always* be true.

Return to Articles
How Are We Different
Understanding Your Financial Statement
Articles on Investing
Investing with Low Cost Index Funds
Pay Yourself First
About the SECURE Act
Why Use a Fiduciary Financial Advisor?
Financial Planning
Quarterly Booklets
Simple, Low Investment Fees
Investor Resources
Investment Tools
Financial Firm Comparison
The Investment Process
One Day In July in the Media
Local Financial Advisor
How to Switch Financial Advisors
Frequently Asked Questions
Types of Investors
One Day In July Careers
Square Mailers
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Environmental Investing: How it Differs from ESG
Vermont Financial Advisors
How to Invest for College Savings
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Aim for Average
How Finacial Firms Bill
Low Investment Fees
Understanding Fixed Income: Interest Rate Risk
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Articles by Dan Cunningham
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics
The Forward P/E Ratio

Shelburne, VT Financial Advisor

Frank Koster | Josh Kruk

145 Pine Haven Shores Road, Suite 2212

Shelburne, VT 05482

(802) 777-9768

Wayne, PA Financial Advisor

Peter Egolf | Adam Roof

851 Duportail Rd 2nd Floor

Chesterbrook, PA 19087

(610) 673-0074

Burlington, VT Financial Advisor

Hans Smith | Katie Bensel

Nancy Westbrook | Peter Egolf

Adam Roof

77 College Street #3A

Burlington, VT 05401

(802) 503-8280

Essex, CT Office

Keith McCarthy

5 Essex Square, Suite 3A

Essex, CT 06426

(860) 581-7011

Rochester, VT Financial Advisor

Available for meetings in Rochester, VT and surrounding area.

Carrie McDonnell

(802) 767-7665

v 2.3.31 | © One Day In July LLC. All Rights Reserved.