803.941.4440 | Chapin, SC
Jan 9, 2017
The scramble of South Carolina’s counties, towns, and school districts in the wake of “the big snow” always ignites my brain to draw parallels between weather and money, particularly in the way people feel about both. When forecasts turn out to be wrong, there is no shortage of anger, annoyance, and jokes that flood social media accounts. My facebook feed for this weekend includes:
“The only job where you can be wrong constantly”
“I can predict better by just looking out my window”
So there are two sides to the coin: is forecasting really that bad? Or are we just oversensitive when the weather predictions fail?
Wait – we are a financial planning firm – I will come back to that.
According to ForecastAdvisor.com, at the time of this writing, MeteoGroup had the best data accuracy for the last year for our zip code at about 77% overall. This combines both weather (highs and lows within 3 degrees to forecast) and precipitation. Overall, its not as bad as it may seem – our brains may be wired to think these weather forecasters perform worse than they really do. However, when a weather forecast goes wrong, very wrong, there can be devastating consequences – floods, ice storms, hurricanes can have life-changing impacts.
Which brings me back to investing. Traditional stock pickers have a pretty rough record of outperforming or even matching the market as a whole (See here or here - the debate rages on). They make weather forecasters look like geniuses - only about 20% of active fund managers beat their benchmark in a given year...when you go out further, repeat performance is even more dismal. And the consequences of picking poorly can also have dire consequences to the end user – the investor.
So what can we do differently? Rather than focus on the short term movements in stock markets (weather), we look at the bigger picture (climate). We look at the long term – 10 years, 15 years or more and determine what scientifically, statistically, and empirically earns money for an investor. We remove much of the day to day nonsense and focus on getting it right in the long term. We stop making short term “forecasts” because we know they are, at best, worthless. Unfortunately for weather forecasters, they don’t have this option, so they keep plugging along as best they can at 77% accuracy.
Here are my takeaways from this:
- Don’t be too hard on the weatherman – he has a nearly impossible job.
- Don’t treat investing like weather forecasts – treat it like long term climate forecasts. Those are a lot closer to reality.
- Don’t get caught in the day-to-day drama of being right or wrong. A good financial plan can weather nearly any storm.
Happy Snowpocalypse 2017!