Fix It Friday - Beware Allowing the Illusion of Predictive Value to Influence Portfolio Decisions!

Disclaimer: [: 00:00:00

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Whether you're just starting [: 00:00:30

And now, here's your host.

han Blau: Welcome to another [: 00:01:00

We can predict that they'll occur. So we can actually therefore learn how to fix them. And that's why we call it Fix It Fridays. So today's bias is called the illusion of predictive value. And what's interesting about that, at least to [00:01:30] me, I, I coined that phrase. I ha I haven't published it anywhere.

efers to is the idea that we [: 00:01:45

One example of, of the illusion of predictive value outside of believing our that what, what our [00:02:00] thoughts are will reflect the outcome. Outcomes. We may not have as much confidence in our thoughts. So we look to authorities. So, for example, in 2016, Paul Krugman, New York Times economist, wrote that right after Inauguration [00:02:15] Day, when Donald Trump is inaugurated, he predicted there's going to be a massive global recession and the stock markets would go down dramatically.

following inauguration, the [: 00:02:30

The outcomes very rarely will reflect anyone's thoughts because [00:02:45] there are no facts about the future. That's always the defining characteristic of the future. So what's interesting is, is that I have a story that I like to relate. It's, it's, it's regarding a client and and this particular bias that was impacting his potential [00:03:00] decision.

o around the time of March of: 2020

And he said to me, my feeling, Jonathan, is I want to sell out all my equities. And I said, what, what is it that caused you to have that feeling? And his response was what caused me to have the feeling is I have [00:03:30] some of the most successful entrepreneurs and business owners in many of the major industries they represent that our country does business in.

is much worse than we could [: 00:03:45

I agree with you. What they have no idea about is what [00:04:00] their, their knowledge of those issues has to do with the economy. The future direction of stocks and the financial markets. They have no idea any more than you or I do. What I can tell you from history is that when we're down 34 percent in 33 days, which [00:04:15] is where we were basically at, at the time I had this conversation in March of 20 the markets have likely factored in all of this bad news and likely bad outcome.

d it in relative to the long [: 00:04:30

What, what also happened is from the day of that conversation in March of 20 through the end of March of 20, so December 31st, rather of 20, [00:05:00] the stock market increased by about 65 percent while all of the bad economic and business events were, were unfolding. So so the lesson there is to to not try to marry what we think about a certain area that we have [00:05:15] expertise in to.

d I'll say it again, because [: 00:05:30

Don't assume someone will say it. Who's maybe better educated in a certain area that you're interested in learning about has more facts about the future or more efficacy predicting the future than you do. They don't [00:05:45] don't succumb to authority bias just because someone's an expert doesn't mean that their thought is a thought you should use in changing as it relates to your investment portfolio, your, your portfolio allocation.

And remember that our [: 00:06:00

And so we're always acting on a very limited knowledge base when we make decisions about On these kinds of biases, when we make portfolio decisions, we should, we should only change our [00:06:30] portfolio under a couple of circumstances. That's when we have a major life change or when our goals or our plan change, and we should never change our portfolio in response to current events, short term market performance.

Geopolitical [: 00:06:45

All failed investors, in our [00:07:15] experience, are Performance driven and market focused. They, they react to almost every current event and change their portfolio in response to, to outside factors that have nothing to do with their longterm plan. And in my experience, those are [00:07:30] always failed investors. So it's important to always act on your plan and never react to current events and and market news.

a guy named Phil Tetlock who [: 00:07:45

Intelligent sounding, and those forecasters have had the worst forecast efficacy. So, it's important not to, not to put too much credence into expert forecasts. And finally, I want to [00:08:15] leave you with one of my favorite quotes that I think relates well to the illusion of predictive value, and it comes from Mark Twain.

uble. It's what you know for [: 00:08:30

So [00:08:45] with that, I, I thank you for joining us for another episode of Fix It Friday. Look forward to to, to being with you next time.

you for tuning in to another [: 00:09:00

Disclaimer: The previous podcast by Fusion Family Wealth LLC, Fusion, was intended for general information purposes only. No portion of the podcast serves as the receipt of or as a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve varying degrees of risk and it should not be assumed that future [00:09:30] performance of any specific investment or investment strategy or any non investment related or planning services, discussion, or content will be profitable, be suitable for your portfolio or individual situation.

ngaged to provide investment [: 00:09:45

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