By Morey Stettner
Some investment professionals study the past. Others look ahead. Why it’s important to do both.
Read enough investment advisors’ comments to their clients and you’ll notice two distinct approaches: Some dwell on the past, while others speculate about the future.
Ideally, of course, advisors look to the past to predict the future. But finding that balance is tricky. “It’s a red flag if someone completely ignores either the past or the future,” said Ryan Patterson, chief investment officer at Linscomb Wealth in Houston. “You have to focus on both. Knowing market history is a basis for looking ahead.”
Like many investment professionals, Patterson is wary of making predictions. He says it’s foolhardy to pretend to know what tomorrow holds. “Individuals can exaggerate their ability to predict the future,” he said.
By tying the past to the future in an unbiased way, Patterson is freed from daily volatility and ambient market noise. Adopting a passionate tone also helps his company’s clients loosen up.
“We are writing our commentary to help investors not let their emotions get the best of them,” he said. For example, “With the recent (U.S. presidential election), we put it in a historical context to show that markets go up over time regardless of who’s in power. It helps investors put their emotions aside” and take a long-term perspective.
Advisors who focus on past market cycles can get carried away when looking back. They can make great historians but leave their audience unsure of what to conclude and where to invest now. “History is a guide, not a blueprint,” Patterson said. “You use that guide to determine your outlook.”
Whether you are an optimist or a pessimist also affects the lens through which you interpret the past or see the future. Some investors like Warren Buffett seem to be staunch optimists. Others cite cautionary tales from past market crazes and issue doomsday warnings.
“No one can predict the future,” says Jay Pelham, a certified financial planner at Miami-based Kaufman Rossin Wealth. “We spend a lot of time reminding people of actual facts — what market trends occurred and what that can tell us in general.”
Striking a tone of certainty risks arousing investor skepticism. Humility, on the other hand, increases an advisor’s credibility. Commentators who admit when they are wrong in misinterpreting the past or making misguided predictions tend to earn trust.
One area of uncertainty, for example, involves the effects of artificial intelligence and other rapidly evolving technologies in shaping financial markets. Some advisors are would-be futurists; they pepper their comments with visions of upcoming innovative breakthroughs.
“Like that Wayne Gretzky quote about playing where the puck will be, we’re trying to predict what tomorrow’s technologies and solutions will be,” said Peter Krull, an advisor at Earth Equity Advisors in Asheville, N.C. “We don’t know for sure. But having a sense of curiosity about where we’re going’ creates vast possibilities.
When analyzing insurance companies as potential investments, for example, it is tempting to review how they have weathered past disasters. But yesterday’s performance may not reveal much about tomorrow’s challenges. “For insurers, the ones we might want to own are integrating climate risk into their underwriting processes,” said Krull, whose company focuses on sustainable investments. “While we can learn from the past, we must be careful not to invest in the rearview mirror.”
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– Morey Stettner
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12-14-24 1218ET
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