Predicting the future of finances can be tricky

I had to chuckle when I saw the wildly divergent weather forecasts published by the Old Farmer’s Almanac and the Farmers’ Almanac. It brought back memories of the mid-eighties when I worked harvest for my two uncles in western Kansas.

Uncle Jimmy (about 12 years older than me) and Uncle Harold (who’s older than my mom) always had differing opinions about how to do things. I remember standing around the pickup, eating the dinner Aunt Joyce had brought out to us, and the two of them arguing over which field we should harvest next. Technically, the plots of land were referred to by its former owners, as in “the Pember place.”

The investment world is much the same way. Just like the almanacs, investing “gurus” base their market “forecasts” on secret formulas that would be difficult to describe as scientifically based. What generally seems to work a lot of the time, doesn’t work other times. Even meteorologists are pretty much always right. If it doesn’t rain when they’ve forecast a 90 percent chance of it, they’re still right – they said there was a 10 percent chance that it wouldn’t.

The almanacs can use their proprietary planetary positions and sunspot activity, and the gurus can use their fancy algorithms all they want. It’s all window dressing to me. Over the last quarter century as a financial advisor, I’ve found two rules and one guarantee for financial success.

The two rules are pretty self-evident – spend less than you earn, and don’t put all your eggs in one basket. Anyone who adheres to these two rules will be fine. Not following the first will guarantee a hellish financial position. Not following the second is basically rolling the dice – you might get lucky. Multiple egg baskets (aka diversification) doesn’t make you rich, but it will keep you from becoming poor.

The guarantee is less evident, and one which the gurus hate to admit. When it comes to investing, you will always be wrong at some point. You will buy too soon, sell too late, or otherwise wish you’d done something differently. But, as my wrestling coach used to say: “if wishes were fishes we’d all cast nets.”

If you buy something that goes up fantastically well, what’s the best course of action? What will it do from here? Well, time always tells. After the fact, many people will say they “knew” it would happen, but nobody knows anything beforehand. The prudent course of action would be to sell part of it (half maybe). Of course, in doing so, you’re also guaranteeing that you’ll be wrong. At some point you’ll wish you’d sold it all or kept it all.

The trick is simply to accept the fact that you’re going to be wrong beforehand and use it to your advantage. It’s OK to be wrong. The trick is not to not be wrong, because that’s impossible. What is possible is to minimize the magnitude of your wrongness.

Farmers and ranchers know this all too well. I remember many times over the years when my uncles doubled up on cattle just to see the price of beef fall or planted more acres just to harvest in a grain glut. When your livelihood depends on things that you cannot control, be it weather or financial gyrations, it’s never a good idea to bet the farm. It’s always better to be partially right than completely wrong.

What’s funny is, both the Old Farmer’s Almanac’s prediction of “Mild, snowy,” and the Farmers’ Almanac’s “Teeth-Chattering Cold, Plentiful Snow” will be correct this year. They both claim to be accurate 80 percent of the time.

Jeff Werner is a certified financial planner and senior vice president with Central Investment Advisors in Springfield, Mo. He can be reached at [email protected].

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