At a recent magic show performance, I wasn't watching what the magician wanted me to follow, but rather his "off" hand. I hoped to be able to figure out how he was performing his tricks, and I knew that by looking at the obvious, I would be missing the subtle. That seems similar to me to these annual predictions we read about what is going to happen this year across a variety of topics.
But the problem with predictions is that if they are tight enough to be useful, they are almost assuredly going to be wrong. The most obvious example in 2014 was that virtually every economist's prediction was for interest rates to go up. But they actually fell rather precipitously. So if you would have ignored the expert prognostications on interest rates, you would have refinanced your mortgage later in the year at lower rates and locked in a little bit higher return on your certificate of deposit in the beginning of the year.
Predictions are often wrong because we are anchored on what is currently happening and looking at the most obvious information. U.S. earnings are strong, the market is at new highs, therefore we will have another decent year for U.S. stocks. Obvious, but most likely wrong. The year will be way better or way worse than what general consensus expects. It almost always is.
So rather than give you some predictions that will be of little service to you, I want to give you some actions for you to consider:
Get out of here
The dollar is the strongest it has been in years. That means when you travel almost anywhere overseas, you will pay less at restaurants and any shopping excursions. You have to work a little harder to see the benefit in hotel rates (you want the rates to be quoted in currencies other than the dollar), but you will save some money by getting away. The dollar could continue to get stronger — the U.S. economy is strong and interest rates could sneak up (I said could), but if you had been waiting to see some of the world, go for it now.
Don't be greedy
You still haven't fully picked yourself up from the stock market downdraft based on the predictions of a worldwide depression and you sold everything at the market lows in March 2009. But now the economy is recovering and you are not the same person. You learned from your panic. You now are a prudent investor ready to buy an S & P 500 index fund. And while you won't admit it, you really want to make up for lost time. The truth is, you probably haven't changed, but your perspective has. Perspective is sleight of hand. In 2009 you were watching what you could lose, now you are spying on what you can gain. Both are reactionary.
Last year, large U.S. stocks did well, small U.S. stocks picked up a little at year-end, and international stocks stunk. Why should that repeat? The U.S. stock market began its recovery ahead of our economic recovery, ignited by a loose Federal Reserve policy. The European Central Bank is expected to open the spigots on money just like the Fed did here. Will that fuel a stock market rally similar to ours? Maybe, but it really doesn't matter.
What is most important is that you have money in various areas so that you can be mostly right rather than have to be absolutely right. If you have cash that you won't be spending in the next three years, invest it gradually in a combination of U.S. and international stocks, large and small. Divide the amount you want to invest by 12 and put it to work every month or each time the market falls by 3 percent. In other words, if the market drops, accelerate your purchases. Once you are fully invested, rebalance at least once a year.
But things will not turn out as expected, and you have to ask yourself whether you have the discipline to stay the course when the detours pop up.
Check your credit
The rate of cyberattacks is predicted to increase. Whether this is true or not, there are some important financial things to do to avoid being caught. First, everyone is entitled to free annual credit reports from the three primary credit reporting agencies. Every four months go to annualcreditreport.com and request a free report from one of the credit agencies until you rotate through all three each year. Then review the report to make sure that there are no discrepancies. Use a different credit card for your online charges than the one on which you make automatic payments. If an online purchase gets compromised, you don't need to change your auto withdrawals. Change your passwords for your financial accounts at least twice a year (I like KeePass for this) and monitor your statements monthly (I use mint.com to do this).
Predictions are illusions because they seem more accurate than they are. Don't predict, prepare.
Ross Levin is the founding principal of Accredited Investors Inc. in Edina.