You may have already noticed, but the title of this note is an oxymoron.

There is no such thing as knowledge of the future because, quite literally, the future is unknowable.

This is as true in business and the markets as it is in life.

In today's email:

• The disconnect between expectations & reality
• Predicting versus planning
• Avoiding investing mistakes

First, did you catch the most recent podcast episode? 👇

Small Cap Value Investing (Part 1): Is This Popular Strategy Dead? What are small-cap value stocks? Why have they outperformed most major asset classes since 1927? And why have they underperformed in recent decades? Listen Now →

Knowledge of the Future

Not only is the future unknowable, but it's much more random than we might like to think.

To make sense of the unknowns in life, we try to spot patterns.

For instance, which of the following sets of coin flips appears most likely to occur?

(H = heads, T = tails)

1. H-T-T-H-H-T-H-T-H-T-T-H
2. H-H-H-H-H-H-T-T-T-T-T-T
3. T-T-T-T-T-T-T-T-T-T-T-T

If you're like most people, you probably assume that #1 is most likely.

It appears more random, and that's what we expect when we flip coins.

But of course, they're all equally likely (assuming a fair coin) since each individual coin flip is a 50/50 occurrence.

Some patterns just seem more probable because they better align with our expectations.

As an example of this disconnect between our expectations of randomness and reality in the stock market, let's go back to 2014.

Here were the returns from the Great Financial Crisis through 2014:

• 2009: +26.5%
• 2010: +15.1%
• 2011: +2.1%
• 2012: +16.0%
• 2013: +32.4%
• 2014: +13.7%

It was as if the coin had landed on heads six times in a row.

And because a streak of good return years does NOT match our expectations of randomness, we anticipate change...usually for the worse.

As evidence, here are three quotes published by popular sources in 2014, predicting that future market returns would be lower.

In light of these articles (and many more like them), what was an investor to do with their portfolio?

It would have been logical for investors to think they should reduce their stock exposure since it appeared the market was fraught with risk and low returns.

Not surprisingly, that decision would have been a costly mistake because here were the returns that followed:

• 2015: +1.4%
• 2016: +12.0%
• 2017: +21.8%
• 2018: -4.4%
• 2019: +31.5%
• 2020: +18.4%
• 2021: +28.7%
• 2022: -18.1%
• 2023: +26.3%
• 2024 (to date): +15.3%

With dividends reinvested, that's an average annual return of 12.9% per year!

In other words, returns were not "mediocre, at best," as the NY Times (and many others) predicted.

Instead, returns were well above the market’s long-term average. 

Why revisit this bit of history with you today?

Because pundits continue to sing the siren song of doom and gloom that future returns will be low over the years to come.

For what it's worth, it's reasonable to say that the market is "expensive" today relative to history (similar to 2014).

However, the correct lesson to learn from the last decade is that nothing can tell us what the future holds.

In Summary

I’m guessing that we will continue to be surprised time and again.

Future returns may be lower.

Or they could be average.

Or higher.

Nobody, I repeat, nobody knows since there is no knowledge of the future.

This is why we don’t try to predict the future.

Instead, we plan.

We build academically sound retirement plans that factor in a wide variety of possibilities—both good and bad.

We monitor the plan. We stress-test the plan. We update the plan. Sometimes, we adjust the plan.

But we don't (and won't) make planning or investment decisions based on some blind guide's opinion, no matter how convincing they may sound.

To staying the course (and ignoring the noise),

Taylor Schulte, CFP®