Why Predicting the Stock Market is Foolish and What to Do Instead

How to use the stock market, not fight it

Humans possess an almost pathological need to know what happens next. Whether we are checking the weather forecast before a weekend at the beach or squinting at a grainy ultrasound to determine if the nursery should be blue or pink, we crave certainty. In the world of personal finance, this desire manifests as a fascination with stock market predictions. Every year, financial news outlets fill their columns with experts claiming to know where the NZX 50 or the S&P 500 will land by December 31st.

The reality remains far less glamorous.

Predicting the short-term movement of investment markets is about as accurate as a cat trying to predict the outcome of a general election. Usually, the cat has better sense and significantly less ego.

If you want to take ownership of your financial destiny, and build lasting financial freedom, you must stop looking for a magic eight ball and start looking at the variables you control.

Is Now a Good Time to Buy Stocks, or Should I Wait?

Every investor wants to know if today represents a bargain or a trap. They ask if the market is too high or if we are due for a correction. They wonder if the latest political upheaval in the Northern Hemisphere will send their KiwiSaver balance into a tailspin.

These questions assume markets are predictable systems. They are not. Markets are complex adaptive systems composed of millions of participants, each acting on different information, biases, and timelines. When a guru makes a prediction, they are essentially guessing how millions of people they have never met will feel about corporate earnings six months from now.

Even investment professionals struggle with this. Investment managers are staffed with highly intelligent and motivated staff, lavishly equipped with to-the-minute information, and even they often struggle to beat simple, unmanaged market indexes over long periods. If fulltime people with the fastest computers and the most expensive degrees struggle to consistently get it right, the average part-time investor should probably stop trying to time the bottom of a dip.

The cost of trying to be clever is high. Missing just a few of the market's best days can catastrophically damage your long-term wealth. According to analysis by Investopedia, investors who remained fully invested in the S&P 500 over a twenty-year period saw significantly higher returns than those who missed even the ten best-performing days of those two decades. Markets tend to recover in sharp, unpredictable bursts. If you are sitting on the sidelines waiting for a clear sign to jump back in, statistically speaking, you will probably miss the very gains which make investing worthwhile.

The most common hesitation goes something like this: “But the market’s already at a record high. Surely it’s due for a fall?” This sounds reasonable, but the data doesn’t support the fear:

• A study published by Forbes shows after each of the last 13 all-time highs, the S&P 500 went on to deliver an average return of 15.3% one year later, rising in 12 of those 13 periods. That is a strike rate most professional athletes would envy.
• Meanwhile, JP Morgan Asset Management crunched the numbers and found investors who only bought on days the S&P 500 hit record highs enjoyed impressive long-term annualised returns of 9.4%. In other words, waiting for a “better” entry point usually just leaves you on the sidelines.

Will the Stock Market Crash Soon?

Fear is a powerful motivator. The media understands this perfectly. Bad news gets attention quickly and enables legacy media outlets to sell advertising slots. Meanwhile steady, boring growth rarely makes the front page. Consequently, investors are bombarded with warnings about the next great depression or an imminent bubble burst.

The truth is that markets crash periodically. This is not a bug in the system; it is a feature. In New Zealand, we have seen the NZX 50 endure significant pullbacks during the 1987 crash, the Global Financial Crisis, and the 2020 pandemic. Yet, in every single instance, the market eventually recovered and reached new highs.

Attempting to avoid these crashes is often more damaging than the crashes themselves. Peter Lynch, one of the most successful investors of all time, noted that far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

Listening to economists is a bit like taking marriage advice from a person who has been divorced six times. They have plenty of knowledge, but economists are not experts with investments, they’re experts with the overall economy. This means they miss the point.

The point is not to avoid the storm. The point is to build a boat sturdy enough to sail through it. Instead of worrying about a crash, focus on your savings rate, overall allocation of assets, and your ability to stay invested when things look bleak.

We’re living through an era of extraordinary technological change. Nearly every company, from household names to small, fast-growing players, is investing heavily in new technology. Artificial intelligence (AI) is the most visible example. Major corporations are committing hundreds of billions of dollars to AI development because they see it as transformational, not just for their own operations, but to entire industries. It should transform our daily lives.

What Happens to My Investments When the Market Goes Down?

When you see your portfolio balance drop, including in a KiwiSaver Scheme account, it feels like losing real money. It is important to distinguish between a temporary decline in value and a permanent loss of capital. A loss only becomes permanent if you sell your assets at the bottom.

Self-reliant investors view market downturns as a sale. If you were shopping for a new car and the price suddenly dropped by 20 percent, you would be thrilled. Yet, when the price of high-quality companies drops by 20 percent, many people panic and run away.

This is the only industry where the customers flee when the products go on sale.

Professional competence in investing is less about picking winners and more about not being your own worst enemy. The greatest threat to your wealth is rarely a market crash. It is the person you see in the mirror every morning while brushing your teeth. When markets get volatile, our lizard brain screams at us to do something. Usually, that something involves selling low out of fear and buying high out of FOMO.

By maintaining a long-term perspective, you allow the power of compounding to do the heavy lifting. This requires a disciplined approach to your finances.

How Can I Take Control of My Financial Future?

If we cannot control the direction of the market, we must focus on the variables within our reach. This is where the shift from being a spectator to being a master of your own destiny occurs.

Self-reliant investors focus on three primary pillars: tax efficiency, behaviour, and diversification.

1. Tax. You cannot control whether the NZX 50 grows by eight percent or shrinks by five percent this year. You can, however, control whether you invest in a tax efficient manner, or not. Every dollar paid in excess tax is a dollar which is not compounding in your favour and funding your early retirement or something else worthwhile.
2. Diversification. It has been called the only free lunch in finance. By spreading your assets across many different industries, countries, and asset classes, you ensure the failure of one does not result in the ruin of all. In New Zealand, investors often get spooked by local headlines regarding interest rates or property prices. While these factors matter, they are often transient. That is, they come and go. The patient investor knows that global innovation, corporate productivity, and human ingenuity are the real engines of wealth creation.
3. Education. Understanding the mechanics of your investments removes the mystery and the fear. This is especially true when navigating complex life stages, such as planning for a comfortable retirement, where the stakes are significantly higher. This doesn’t mean formal education either. There’s no shortage of podcasts, books, YouTube videos, and so on to learn from.

Why Predicting Market Movements is Usually a Waste of Time

The pursuit of the perfect investment entry point is a form of arrogance. It assumes you know something the rest of the market does not. In reality, the current price of a stock or an index reflects all publicly available information and the collective expectations of millions of people.

Instead of trying to outsmart the market, focus on your own timeline. If you are twenty years away from retirement, when you will probably start to access your investment fund, the price of the market today is almost entirely irrelevant. What matters is the price of the market in twenty years.

Warren Buffett, the peak of the investment field, famously noted that the stock market is a device for transferring money from the impatient to the patient. Patience is a superpower in a world obsessed with instant gratification.

To build trust, we must look at what the evidence tells us. Study after study shows how market returns over long periods of time are driven by company earnings rather than the hot tips of the week.

Evidence-based investing involves looking beyond our shores to capture growth in sectors which barely exist in New Zealand, such as large-scale information technology, resources, and financial services. This is a more professional approach, which involves moving away from a get-rich-quick mentality and toward a get-wealthy-surely approach.

The Myth of the Perfect Economic Conditions

Many people suffer from analysis paralysis. They wait for low inflation, low interest rates, high employment, and political stability before they start their investment journey.

If you wait for all those lights to turn green simultaneously, you will never leave your driveway.

Historically, some of the best times to invest have been when things looked the bleakest. Markets are forward-looking. By the time the news tells you the economy is back on track, the stock market has likely already priced in that recovery and moved higher. Taking ownership of your destiny means starting where you are, with what you have.

When you understand the mechanics of the market, you cease to be a victim of its fluctuations. You become a participant in its growth.

What Will Actually Happen Next With the Stock Market?

We can tell you with 100 percent certainty: it will go up, it will go down, and it will eventually go higher than it is today.

Between now and your retirement, there will be wars, pandemics, elections, technological revolutions, and economic crises. There will also be periods of unprecedented growth and innovation. The noise will always be loud. The world will continue to move forward, and those who own a piece of that progress will do very well over time.

What Alternatives Are There to the Stock Market?

When people avoid equities (shares), they often end up chasing other investment choices. Some lean on property, others on term deposits, and a few flirt with exotic assets like paintings or cryptocurrency. While diversification is healthy, it’s worth remembering most alternatives either carry substantial risks or fail to keep up with inflation after holding costs.

Property can certainly build wealth, but it comes with liquidity issues, maintenance costs, and regulatory complexity. Term deposits are about as safe as you can get but, as discussed, weak after tax and inflation. And as for cryptocurrencies, let’s just say if you want your wealth plan to look like a rollercoaster, they’re perfect.

The enduring lesson from more than a century of financial history is that equities, held over long timeframes, remain the most reliable engine for long-term growth.

The Bottom Line: Don’t Fight Market Forces, Use Them

Your role is not to outsmart the market. Your role is to out-discipline it.

The stock market does not care about your feelings, your politics, or your predictions. It is an indifferent machine which rewards those who provide it with capital and patience. By focusing on your savings rate, your asset allocation, and your long-term vision, you are taking the most pro-active stance possible. You are deciding your future will be defined by your actions, not by an online headline.

Stop trying to predict the unpredictable.

The quest for the perfect moment to invest is a ghost chase which only results in missed opportunities and unnecessary stress. Real wealth is not built through prophetic insight or timing the market. It is built through the relentless application of a sound process and the courage to stay the course when others are hesitant or even panicking! You are the architect of your own financial future. The tools are in your hands, the blueprint is your long-term goal, and the only thing missing is the decision to stop waiting for a sign from the heavens. Markets will do what markets do. The only question is: what will you do?

Take the lead in your financial journey and ensure your future is one you chose, not one you settled for. To discuss how to align your investments with your goals, reach out to our team today.