When it comes to what we watch on TV, my father and I couldn’t be more different. My father, Rich Paul, founded this firm, and many of you know him well. He has always been captivated by the latest news, constantly seeking to stay informed and ahead of the curve. When I visit his house, I’m immediately greeted by the sound of the TV blaring some financial or political pundit’s opinion. The first thing I do? Walk over and turn it off.
It’s not that I’m uninterested in what’s happening in the world—far from it. But I’ve learned over the years that the endless stream of hot takes, from doomsdayers forecasting the next financial apocalypse to permabulls promising boundless market growth, is just noise. At the end of the day, they have no idea where the market is going to go. My focus is on what truly matters: valuations, groundbreaking innovations, and the broader macroeconomic trends shaping our world.
The Evolution of Risk Tolerance
Back when I joined the firm fifteen years ago, we were still in the shadow of the 2008 Financial Crisis. Nobody wanted anything to do with risk assets. Stocks were considered too dangerous, and many clients were laser-focused on preserving what they had. Fast forward to today, and we’re in the 52nd month of a historic bond bear market, as the US Aggregate Bond Index has provided negative returns over 5 years. To put that in perspective, the previous worst bond bear market lasted just 16 months. Yet now, instead of shying away from risk, investors are diving headfirst into it, often taking on more than they’re truly comfortable with while ignoring bonds entirely.
This stark contrast between 15 years ago and today raises an important question: Is risk tolerance a broken concept?
The traditional approach to determining risk tolerance involves assigning a static number to an investor based on their answers to a series of questions. But as humans, we’re wired to be terrible investors. Our emotions—fear and greed—are constantly at odds, pulling us in directions that undermine our long-term goals. When markets are soaring, greed takes over, and risk tolerance inevitably gets extended. But when markets crash, fear reigns, and that same tolerance begins to vanish. How reliable is a number that can and will shift with the market’s every twist and turn?
I’d argue that risk tolerance isn’t just a measure of what you’re willing to lose at a moment in time; it’s a reflection of your ability to stick with a plan through thick and thin. Instead of focusing solely on your appetite for risk in good times, it’s crucial to consider how you’ll react when things don’t go as planned—because they inevitably won’t. Understanding this dynamic requires self-awareness and, often, a reality check from a trusted advisor.
Markets Don’t Care About Your Predictions
If you’ve been following the financial news, you’ve probably seen JPMorgan’s recent prediction: there’s a 45% chance of a recession in 2025. Sounds precise, doesn’t it? But when you dig into what that number actually means, you realize it’s utterly meaningless. Whether we have a recession or not, they can claim they were “right.” After all, 45% is close enough to hedge either way. It’s a classic case of looking authoritative while saying nothing of substance.
And yet, these kinds of predictions dominate financial headlines every year. Why? Because we crave them.
The Human Obsession with Certainty
We call this phenomenon “Investor Prediction Syndrome.” It’s the compulsive need to cling to forecasts and predictions, no matter how inaccurate they’ve proven to be in the past. Market predictions thrive because they satisfy something primal in us: the need for certainty in an uncertain world. We idolize those who appear confident, especially if they wear a suit, sit under bright studio lights, and talk with conviction on TV. The louder the pundit, the more we listen, forgetting that confidence and accuracy are not the same thing.
This obsession leads us to place blind trust in forecasts, despite the overwhelming evidence that they are almost always wrong. And the 2024 predictions were a masterclass in just how off-base these guesses can be.
2020-2024: Five Years of Missed Targets
Take JPMorgan’s forecast for 2024: they predicted the S&P 500 would end the year at 4,200. Sounds reasonable, right? Except the market closed at 5,882, after briefly crossing 6,000 during the year. This wasn’t an isolated error, either—not one of the 20 major Wall Street predictions for 2024 came close to being correct.
Even JPMorgan, the same firm making these predictions, would admit they wouldn’t base any significant allocation decisions on that 4,200 target. So, why publish it at all? Because it generates headlines, drives client conversations, and keeps the illusion of foresight alive.
The problem isn’t just that these predictions are wrong; it’s that they’re consistently wrong in ways that should make us question why we listen to them at all. In fact, over the last five years, the S&P 500 has never ended the year between the highest and lowest annual predictions.
The Markets Don’t Fit Neatly Into Predictions
The truth is markets don’t operate on tidy, predictable patterns. Even though the S&P 500 has averaged 10% annual returns over the past century, only 6 times in the last century has it ended a year with gains between 8% and 12%. The rest of the time, it’s all over the map.
Adding to this unpredictability is the fact that 1 out of every 4 years, the market ends in negative territory. Yet every year, you’ll hear a chorus of voices predicting doom. Recession. Market crashes. Catastrophe. And when the market doesn’t implode, those same voices conveniently gloss over their mistakes and issue fresh predictions for the next year.
There should be a rule, for each prediction you make, you have to disclose how wrong (or right) you were the previous year.
What Should You Do Instead?
Here’s the hard truth: you don’t need to know what the S&P 500 will do this year to be a successful investor. Instead of obsessing over forecasts, focus on what you can control:
- Stick to a long-term plan. Time in the market beats timing the market.
- Diversify. A well-diversified portfolio reduces the need to predict anything.
- Ignore the noise. Predictions are entertainment, not actionable advice.
Financial firms will keep publishing their guesses, and the media will keep amplifying them. But as an investor, you don’t have to play their game. Remember, the markets don’t care about your predictions—or theirs. They’ll do what they always do: go up, down, and everything in between.
Staying Grounded in What Matters
The financial world is filled with distractions. Headlines scream about the next recession, the latest rally, or some sensational prediction that promises to change everything. But history has shown us that markets are unpredictable and sentiment is fleeting. Whether it’s the pessimism of 2008 or the exuberance of today, the pendulum always swings.
What endures are the fundamentals: Are valuations reasonable? What innovations are reshaping industries? How are global economic forces influencing opportunities and risks? These are the factors that guide investment decisions, not the noise of the day.
So, what’s the antidote to Investor Prediction Syndrome (IPS)? It’s deceptively simple: the remote control. Turn it off. Or, if you need to satisfy your craving for predictions, turn to something lighter—like figuring out if an object is a cleverly disguised cake on Is It Cake? You’ll find it far less stressful than trying to predict the exact trajectory of the market this year.
In all seriousness, the moment you stop letting the endless noise dictate your actions, you regain control over your financial decisions. By tuning out the pundits and focusing on what truly matters, you’ll find the clarity to stick to a disciplined, long-term strategy—one that doesn’t depend on guessing what the market will do next.
As we navigate these uncertain times, let’s remember that investing isn’t about chasing the latest trend or reacting to the news cycle. It’s about discipline, perspective, and focusing on what truly matters. And as much as I respect my father’s love for staying informed, I’ll stick to my approach of tuning out the noise and staying grounded in the principles that lead to long-term success.
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.