Best Laid Plans

Trying to predict the short-term movements of markets is complex and precarious. Georgie Loxton founder of Liberty Wealth offers some expert pointers

“As humans, we have a dismal track record at predicting the future. That doesn’t however seem to stop us trying. We are constantly bombarded with “expert” prognostications about what is going to happen next in the economy or the stock market. Wall Street calls it their ‘market outlook.’

A few hours spent watching CNBC or reading the financial media would give you a dozen different market outlooks –most would be wrong, but it would be impossible to know which. If all you have is an outlook, you will find yourself constantly changing your mind as circumstances change.

This will always lead to making the wrong decision at the wrong time and an inevitable erosion of wealth over time. Trying to predict the short-term movements of markets is diametrically opposed to the patient, disciplined approach to building and sustaining wealth that we espouse.

What we need, is a philosophy that we can combine with a plan. A philosophy is impervious to circumstance – it doesn’t change when the market rises or falls. A plan is focused on our life and what we want our money to do for us.

With our approach, we acknowledge that things rarely go according to plan. That doesn’t stop us planning, but it means we always build in room for error or a margin of safety. A margin of safety is the only way we can navigate a world that is entirely unpredictable. It gives us a gap between what we think will happen and what can actually happen.

We build in this gap by limiting our use of leverage, by maintaining liquidity, by staying globally diversified and by never investing in something that can blow-up, by sticking to the long-term rules and the principles that have always worked.

Not only do we have the humility to admit that we don’t know what will happen next, but we also understand that it doesn’t matter. By staying invested long enough to let compounding work its magic, we ultimately know what will happen and that’s all we need to know.