What is your New Year’s Resolution? Why is that important to you?
2021 is here along with the wishful hopes of millions as they commit to new resolutions for the New Year. A 2015 study by US News suggested that over 80% of “resolution-ers” have failed by the second week of February [1].
Ouch.
With an 80% chance of failure, it might make logical sense to forego the effort and simply say “Yes” as the dessert cart wheels pass the dinner table.
It caused me to ponder, why do we even follow this tradition of making resolutions every year? As it turns out, the tradition of New Year’s resolution dates all the way back to the early Roman Empire. Julius Caesar, with all his ego, tasked his most intelligent astronomers and mathematicians to create a new calendar, which would be called (you guessed it) the “Julian Calendar.” To his credit, it is essentially the precursor to the modern calendar we use today.
Caesar established January 1st as the beginning of the New Year, named after Janus, the mythical god of new beginnings. His figure is represented with two faces, one looking forward to the future, and one looking backward toward the past. As a result, the Romans would give gifts and make promises believing Janus would forgive them for their wrongdoings in the previous year, and bless them in the year ahead.
To summarize, if you need to place blame for your New Year Resolution, you can point the finger at Julius Caesar.
Interestingly, the stock market often operates like a New Year’s Resolution. As the New Year comes to pass, experts from all over the globe will predict the performance of the market for the year ahead. The big question on every market outlook is, “What can we expect in 2021?”
Allow me to put this in perspective. Claude Shannon, a renowned MIT mathematician, calculated the number of possible moves in a game of chess. His work revealed an incomprehensible 10 to the 120th power possible moves. That’s a 1, followed by 120 zeros... a sum that exceeds the number of atoms in the known universe. His point was to demonstrate the impracticality of predicting the optimal strategy to any game. Yet a game of chess is simple compared to the stock market.
While I don’t have a statistic to support this, I imagine that (like a New Year’s Resolution) 80% or more of the expert market predictions for 2021 will have failed by the second week of February.
So here’s the real question… Why?
A family therapist our company consults with explained it to me simply. He said that people fail in their resolutions because they don’t have a vision of their outcome. To paint me a picture, he put it this way: If you want to lose 15 pounds, why do you want to lose 15 pounds? Is it so you can look better in the mirror? Or so you will be in good health to walk down the aisle of your granddaughter’s wedding?
His point is that you have to tie your goal to a desired outcome. The image and the feeling of the outcome is the internal motivation we need as human’s to stay the course.
As it turns out, navigating the market in the New Year is nearly the same. If you think about it, most people’s desired outcome for their investments is the highest probable return in perpetuity. But often we act different when predictions don’t pan out, or the market is volatile, or we see a negative loss in our portfolio. Short term circumstances change and sometimes we lose sight of the desired outcome.
I’m reminded of Warren Buffet’s 2007 bet with a collection of actively traded hedge funds. The wager was a $1 million to the charity of the winner’s choosing to whoever had the best investment performance after 10 years. Buffet put all of his eggs into one diversified basket, an S&P 500 index fund. By 2017 he considerably outperformed the actively traded hedge funds, and walked away a winner by doing virtually nothing.
The lesson here isn’t that the S&P 500 outperforms hedge funds. In some years it will. And in some years, it won’t. But historically and over time, investing predominately into diversified equities continues to be a consistent way to build wealth. If the desired outcome, as stated above, is the highest probable return in perpetuity it certainly makes a strong case for keeping things simple. And, perhaps more importantly, it encourages a long term outlook consistent with the ultimate goal.
The solution in navigating the market in the New Year isn’t to simply “not look at it.” But it’s to understand that a well thought out strategic plan and investment philosophy can help solidify the bigger picture. As Stephen Covey said, “keep the main thing, the main thing.”
So as you enter into the New Year and the New Market, here are a few practices to help you keep the main thing, the main thing:
I wish you great success in all your resolutions for 2021.
From our family to yours—Happy New Year!
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