The “R” Plan – 5 Steps to Combat the Prediction Hubris, Ep # 114 FINANCIAL PLANNING

Nobody can say that the stock market has been turbulent lately. In times of market uncertainty, investors seem to be even more certain of their forecasts for the next stock market moves. As people make these predictions, the stakes get bigger over time. Listen to this episode to hear five steps you can take to combat the hubris of prediction.

Prosperity is not determined by selected investments, but by the behavior of investors

As markets become more volatile, the desire to control our results becomes stronger. Our instincts put pressure on us to take forward-looking steps that we believe will happen. This is when the ability to stay disciplined can have the greatest impact.

Otherwise, we will sweat out extreme buy and sell decisions that could result in you missing out on the biggest market move days. In our most recent examples in the past 3 months, there was a good chance you saw 3 of the worst 25 one-day losses and 2 of the biggest 25-day gains in the S&P 500.

For this reason, we have created an exercise that allows you to think about your investment strategy in times of market stress. We call it the “R” plan, in which we provide five steps to combat the inevitable forecasting hubris that occurs during these periods.

The “R” plan

5 steps to combat forecasting hubris

Notice Your past predictions. Think about the predictions you made in the past few months. How did they end? Do you remember the overwhelming fear we all had in March? Do you remember 2008? How about the tech bubble? How have your stock market forecasts developed in these difficult times?

regret – The decisions you make in the short term can have a big impact on your long-term assets. The daily fluctuations can be enormous if the market is volatile. Pensioners often feel that they do not have the time or the ability to make up for losses, and many choose to sell and escape to cash security. However, the decision not to ride the wave can lead to serious regret.

elasticity – We often forget how robust the stock market is over time. The decline in the equity markets was only temporary and it is easy to forget that you are seeing stock market gains in three quarters of the cases. It is also good to remember that the bear markets are shorter than the bull markets. The lesson: declines are temporary, but profits are long-term.

review – If the markets are volatile, take the opportunity to think about your portfolio. Think in dollars rather than percentages to make potential losses more real to you. When reviewing your portfolio, keep the following tips in mind:

  • Be more conservative if you are uncomfortable with losing half of your wealth.
  • Diversification – we may have mentioned that a few times.
  • Hire a specialist, an investment planner and a financial planner
  • Consider all of your options
  • Implement an investment strategy based on your financial goals

reward – Investing in a balanced portfolio with equity exposure paid off in the long term. Yields are also strongest after the steepest declines. It is difficult to get through the difficult times to get the rewards. Because it’s rarely a smooth ride. Yields in a given year ranged from 54% to -43%. In fact, according to Dimensional Research, the S&P 500 has returned within plus or minus 2 percentage points of this 10% average in just 6 of the last 94 calendar years.


Outline of this episode

  • [2:06] How can you fight your instincts to make predictions?
  • [7:04] The decisions you make in the short term can have a big impact
  • [10:21] The stock market is robust
  • [14:54] Tips for tackling stock market problems
  • [20:54] Focus on the reward

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Chad Smith

Chad Smith is a Certified Financial Planner ™. He is an active member of NAPFA, the Financial Planning Association and NexGen of FPA. He was cited and appeared on,,,, Financial Planning Magazine, Triangle Business Journal and Investment News.


Mike Eklund

Mike Eklund is a CERTIFIED FINANCIAL PLANNER ™ practitioner. He also has Chartered Retirement Planning Counselor and College Funding, and Student Loan Advisor. He is an active member of NAPFA, co-moderator of the Financial Symmetry podcast, and has been cited in various industry publications.

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