“Do you ever feel like the stock market is like a rollercoaster ride? One day you’re up, the next day you’re down, and you can’t help but scream ‘Why did I get on this thing?’ Well, let me tell you, the market is like a rollercoaster, but it’s one that you can’t get off of. And like any rollercoaster, it’s not for the faint of heart. But here’s the thing – the market outlook isn’t what’s important when it comes to financial planning. It’s all about your personal goals.

A million-dollar question asked by almost all the market participants, direct or indirect and people sitting on the benches, trying to update themselves with the latest trend is, “Market kya lagta hai?”. Translated version is what is the future equity market outlook?

A common investor who asks this question, generally has a short-term outlook and actually wishes to just get an affirmation to his or her own views or positions. A person who is holding stock always hopes to hear and appreciate the positive market outlook and a person waiting to deploy funds or shorting the markets thinks otherwise and interestingly during all phases, there are experts giving market outlooks on both the positive and negative sides.  

By definition, Market outlooks, also known as market predictions, are forecasts about the future performance of the stock market or the economy. They are often made by market analysts, economists, and financial experts, and are often used to guide investment decisions.

There are several ways that people give market outlooks. Some use historical data and trends to make predictions, while others use technical analysis to identify patterns in the market. Still, others use fundamental analysis to evaluate the financial health of individual companies and industries. Some market outlooks are based on a combination of these methods.

Despite all the claims by so called Market Experts, I only find one smart answer that is diplomatic and correct , that is “Over short term we are cautiously optimistic and long-term trend looks really exciting . In short term , we expect market to exhibit volatility and we recommend to deploy funds in phased manner in every downside”. This statement is the most apt and suitable statement in all conditions.

And that’s where, it’s important to note that predicting short-term market movements is extremely difficult, if not impossible.

Studies have shown that market predictions over the short-term are often inaccurate. For example, a study by Dalbar, Inc., a US Market researcher, found that the average stock market forecast by experts was accurate just 47% of the time.

Another study by the CFA Institute found that professional market analysts have a poor track record when it comes to making short-term market predictions. The study found that less than 20% of market predictions made by analysts were accurate over the short-term.

Additionally, many academic studies have shown that market forecasts are not very accurate over short-term horizons. A study by two researchers at the University of California found that even experts are not able to predict short-term market movements with any degree of accuracy.

The first reason market outlook is irrelevant is that it is impossible to predict the future. No one can know for certain what the stock market or economy will do in the short-term or long-term. Even the most experienced analysts and economists can only make educated guesses. So, basing financial decisions on predictions about the market is a risky strategy that can lead to poor financial outcomes.  

The second reason market outlook is irrelevant is that it can distract from the more important task of achieving personal financial goals. For example, someone who is saving for retirement may be tempted to pull their money out of the stock market if they hear that a recession is coming. But if that person’s goal is to retire comfortably, then the state of the market should not matter. A long-term investment strategy that aligns with the individual’s retirement goals is much more important than trying to time the market.

One behavioral finance concept that is relevant in this context is “herding behavior.” This refers to the tendency for people to follow the crowd and make decisions based on what others are doing, rather than on their own goals and research. For example, during a stock market rally, many people may invest in the stock market because they see others making money. But this can be a dangerous strategy, as it can lead to buying high and selling low, rather than making investment decisions based on the individual’s personal financial goals.  

Another behavioral finance concept that is relevant is “loss aversion.” This refers to the tendency for people to strongly prefer avoiding losses to acquiring equivalent gains. This can lead to people avoiding risk and missing out on potential gains, even when the risk is necessary to achieve their financial goals. For example, if someone is saving for retirement, they may be reluctant to invest in the stock market because they fear losing their money. But this fear of loss can lead to missing out on the potential gains that can come with long-term investing.  

To illustrate this, consider the example of an individual named Pankaj. Pankaj is a young professional who just started his career. He wants to buy a house in the next ten years, and therefore he has set a goal to save 20,00,000 for down payment. But due to the recent market downturn, he is hesitant to invest in the stock market, as he is worried about losing his hard-earned money. So, he keeps his money in a savings account, earning a low-interest rate. But due to inflation, his money’s purchasing power is gradually decreasing, and it’s not growing as much as it could be. He realizes that he may not be able to achieve his goal of buying a house in ten years, as his savings are not growing as much as he had hoped.  

Here, Pankaj’s behavior is influenced by his fear of losing money, which is a common behavioral finance concept called “loss aversion.” Instead of making decisions based on his long-term financial goal, he allowed his emotions to drive his decision-making. A financial advisor could have helped him understand that investing in the stock market, although comes with some level of risk, can also provide the potential for higher returns over the long term, which could help him achieve his goal of buying a house in the future.  

Behavioral finance is the study of how psychology influences financial decision-making. It can help explain why people may make decisions that are not always rational or in line with their long-term financial goals. Incorporating behavioral finance aspects can add an additional layer of understanding to the idea that market outlook is irrelevant for financial planning.  

This leaves us with an important question, so, what would be a more relevant question that should replace the Million-dollar question with a Billion-Dollar question for the investors??

“ What are my personal Goal ?  Where do I stand now ? How do I achieve my goals? “ These questions , though boring and calls for introspection can really make all these market outlooks largely irrelevant when we shift our focus to financial planning.

While market outlooks can be informative and provide some insight into the broader economic and financial environment, they should not be relied upon to make investment decisions. It’s important to remember that market predictions over the short-term are often inaccurate, and it’s more important to focus on your long-term financial goals and objectives. A well-diversified portfolio and a long-term investment strategy are more likely to help you achieve your financial goals, regardless of the short-term market conditions.

So, what should drive financial decisions? Personal goals. Financial planning should start with setting and defining personal financial goals. These goals can include anything from buying a house, to saving for retirement, to starting a business. Once these goals are defined, a plan can be created to achieve them. This plan should include budgeting, saving, and investing strategies that align with the individual’s goals and risk tolerance.  

When it comes to budgeting, it’s important to prioritize spending on the things that are most important to achieving personal financial goals. This could mean cutting back on unnecessary expenses and redirecting that money towards savings or investments.  

Saving is also critical for achieving personal financial goals. This can include setting up an emergency fund, which can help provide financial security in case of unexpected expenses. Additionally, it’s important to save for larger purchases or investments like buying a home or starting a business.  

Investing is another important aspect of achieving personal financial goals. But it’s important to remember that investing should be based on the individual’s goals and risk tolerance, not on market outlook. This means diversifying investments to minimize risk and aligning investments with the individual’s time horizon. For example, if someone is saving for retirement, they may want to invest in a mix of equity and debt, rather than trying to time the market with high-risk investments.  

In conclusion, market outlook is largely irrelevant when it comes to financial planning. Instead, personal financial goals should drive financial decisions. Setting and defining personal goals, budgeting, saving, and investing strategies that align with those goals, and risk tolerance are the keys to achieving long-term financial success. It’s important to remember that financial planning is not about trying to predict or react to market conditions, but about creating a strategy that aligns with the individual’s specific needs and goals.  

Finally I wish to reiterate, don’t let the “Market Kya Lagta hai “ control your financial decisions. Make sure to set your own personal goals and align your investment decisions with them.  And remember, a financial advisor is like a rollercoaster operator – they’ll make sure you’re strapped in tight and ready for the ride.

Rtn. Er. Bhanu Pratap Jain, CFPCM |CII (Award) UK| CFGP The author is a computer science engineer by qualification and a certified financial planner by profession. He helps professionals and businessmen with personal finances and help them retire early. His firm manages wealth for 700 families since last 50 years with assets under management and advisory of more than 200 Crores . He can be reached at ceo@financialarchitect.in

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *