How to Gain Value from the Unpredictability of the Free Markets

How to Gain Value from the Unpredictability of the Free Markets

free markets

As we explored in our previous blog post, no one – not you, not your financially savvy friend, not your financial advisor and especially not the media gurus spouting investment tips – can predict the future. In fact, the free markets work because of (not in spite of) the fact that no one can predict the future. We also explored the underlying realities that make it possible to create wealth in a random and unpredictable environment. Now we’re taking you deeper into the discussion about the free markets so you can make smart investment decisions and gain peace of mind.

It’s easy to lose sight of the fact that the financial media’s primary goal is to sell certain products or ideas, not help us lay out a sound plan for creating wealth over the long term. So when we’re bombarded with hot investment tips and urged to make decisions based on emotionally charged statements, it’s critical to stay grounded. The best way to do that is by gaining factual insight on the unpredictability of the free markets and its valuable role in helping you reach your financial goals.  


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Free Markets Work

The free market is defined as “an economic system based on supply and demand with little or no government control. It is a summary description of all voluntary exchanges that take place in a given economic environment. Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions.”

Some of the key concepts to highlight here are “little or no government control,” “voluntary exchanges” and “spontaneous and decentralized arrangements.” They all point to the idea of unpredictability and lack of control. And while those two notions can strike fear into an investor, they are actually what make a free market economy so effective.

Free markets create wealth without anyone intervening, manipulating or controlling them, and they have done so over vast periods of time. Investors who don’t recognize and celebrate this reality may try to forecast, stock-pick, time the market or use track record investing. But these strategies lead to bad investing behaviors, like buying stocks when they are high, selling stocks when they are low, chasing managers who’ve had a “hot hand,” incurring massive amounts of turnover in their portfolios, and lacking any real discipline in the process.

You don’t have to fight market forces. Instead, accept and embrace them. The randomness inherent in free markets creates wealth and risk premium. Without the risk, there’s no potential reward. You simply don’t have the ability to predict the market, and that’s OK. Market prices are a self-regulated system, and if you trust that system, you have the power to build a portfolio that reaps positive returns over the long run.

The Truth About Bad Investing Decisions

When investors lack the insight to embrace the unpredictability of the free markets, they can be heavily influenced by emotional and psychological biases that impede their long-term financial goals. To accumulate wealth, you must be able to make decisions that maximize investments year after year, which requires a more informed and accepting approach to the realities of the free markets.

Misguided or emotion-driven actions have the potential to impair your focus on maintaining a prudent investment strategy. When this happens, you may believe that you have some sort of control over or insight into the future of individual investments (though you actually don’t). Some of the most commonly misappropriated investing tactics based on this approach include:

Stock Picking

Some individual investors believe they can choose stocks that will perform well in the future. This belief may be a product of reading financial reports, connecting emotionally to a specific company or simply following a “gut” feeling. But there’s really no way to know whether a company’s stock will appreciate, and picking individual stocks has proven to be a losing strategy over the long term.

Market Timing

Any short-term approach to investing is generally an unwise and unprofitable one. By trying to time the market, investors gamble with their money and are more likely to make decisions that negatively impact long-term results. Yes, you may be able to make some portfolio changes that temporarily benefit from a particular market shift, but given the unpredictability of the markets as a whole, these kinds of investment moves are based primarily on guesses (even if they’re masked as well-informed strategies or lucrative advice). And there’s just not enough consistency in a guessing game to derive real long-term value.  

Track Record Investing

Historical success and appreciation does not equate to future success and appreciation. Period. When investors base their strategies on the idea that funds or securities that performed well in the past will also do well in the future, they’re employing a faulty approach. Contrary to what some media gurus may convince you to believe, track record investing has never been proven to provide greater returns. Why? Because, as we’ve uncovered, the future is unpredictable in a free market.

The Seven Investor Declarations

If your goal is to achieve success as an investor and build long-term wealth, you must acknowledge the fact that it is about much more than simply creating efficient portfolios. It’s also about overcoming misguided notions of predictability and control in a free market. The types of decisions and behaviors driven by these beliefs routinely destroy long-term investing results and erode confidence in reaching your goals.

Fortunately, you can embrace a sounder approach by controlling your emotions and leveraging the power of declaration. The following seven investor declarations help to create new possibilities for your financial future. Commit to adopting and declaring them in your own investment pursuits to override any misled beliefs about the free market and reinforce the concepts that make long-term wealth a reality:

  1. I declare my belief that free markets work.
  2. I declare my belief in the equity premium.
  3. I declare my belief in the small premium.
  4. I declare my belief in the value premium.
  5. I declare my belief in global diversification.
  6. I declare my belief in utilizing high-quality, short-term fixed instruments to help reduce volatility.
  7. I declare my belief in the power of rebalancing and discipline.

We can’t ignore the fact that all of us  tend to fear the unknown. We have a standard psychological response to anxiety, and seek answers that give us a sense of certainty. But those answers can be seriously flawed, and how you handle uncertainty has a significant impact on your investing outcomes.

If any investment were absolutely certain, it would be without risk. Everyone would invest the same, and the free markets would no longer be “free.” That’s why it’s paramount to avoid losing sight of your long-term goals and thoughtful investment strategy. Of course, negativity runs rampant on financial media outlets, so it can be challenging to honor your declarations and stick to your strategy.

There is a limitless array of market scenarios that could play out in the future, and you lack control over any of them. So focus on what you ARE able to control, including a healthy understanding of the free market, global diversification and long-term discipline. Work with an experienced financial coach to create an expertly engineered investment portfolio based on the fundamental truths of the free market, and above all, don’t let the fear of uncertainty drive poor investment behavior.

To learn more about smart investing strategies that can bring about true peace of mind, download your free copy of the Investor Awareness Guide


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About Greg Hammond, CFP®, CPA

Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.