Risk specialists are betting on a worldwide disaster...
The World Economic Forum published its annual Global Risks Report last Wednesday. This report surveys about 1,500 risk experts in fields such as academia, business, and government.
The goal is to collect their opinions about potential global risks to create forecasts for the present and future. And this time, the outlook was especially gloomy...
About two-thirds of respondents predicted a high chance of "global catastrophes" in the next decade. And 30% said they believe a catastrophe is likely in the next two years.
These doom-and-gloom claims tend to grab our attention. This report forecasts a lot of risk on the horizon... which may cause folks to fear for their wealth (and even well-being).
But just because the experts agree on something doesn't mean they're 100% right. And as investors, it can be dangerous to always follow the crowd and act on consensus alone...
Analysts are people, just like us. They enjoy being rewarded. And they find comfort knowing others share their opinions. So conditions are ideal for them when the consensus bet is bearish...
That's because if you underpromise and the market overperforms, everybody is still happy. Analysts can drum out a constant beat of terrifying economic stories in a bull market. And most financial publications do...
But what's safe for analysts isn't always a great idea for investors.
To see what I mean, look no further than October 2022...
We were at the tail end of a terrible bear market. Months of grinding losses erased more than 25% from the S&P 500 Index's market cap.
No one knew when the pain would stop... until, finally, economists told us that it simply wouldn't. On October 17, Bloomberg published this headline...
Bloomberg's model said that a 2023 recession was "effectively certain." And a separate survey of 42 economists put the likelihood at 60%.
The article provided investors with an overwhelming forecast for a terrible year. But I hope you ignored it... because stocks bottomed five days before it was published.
Take a look...
Stocks have soared 30% since Bloomberg's article came out. If you sold based on the consensus view, you missed a year of furious gains.
So when analysts reach a consensus about the economy, ask yourself whether it's due to sober analysis... or if it's the result of something more psychological.
Better yet, you can ignore the analysts and develop a trading system of your own.
Any investor can use a few simple tools to reduce human error in their portfolio...
Simple trend-based systems can help you take the guesswork out of when to buy and sell an asset. For instance, you can keep an eye out for investments trading above their moving averages (which measure short-term and long-term trends). That's often a sign that prices can keep rising.
Meanwhile, stop losses can help you avoid unforeseen drawdowns. In essence, a stop is a preplanned level where you'll exit a position. That could be when the stock falls a certain percentage from its highs... or when it hits its previous low.
Sure, investing comes with risks – both now and in the foreseeable future. But that has been true for the entire history of the markets.
That's why consensus will never be enough. Do your own analysis before diving into any investment... And don't let the crowd sway you to jump.
Good investing,
Sean Michael Cummings
Further Reading
"Most individual investors don't understand risk at all," Dr. David Eifrig writes. Knowing the difference between volatility and risk is what will separate you from the amateurs. And it's also what will help you keep your losses small... Read more here.
"People often make clouded judgments in down markets or periods of uncertainty," Chris Igou writes. It's human nature to overlook the simple solutions. But when it comes to investing, it's smarter to stick with what works... Learn more here.
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