Ask the Advisor: On Making Economic Predictions for 2011

Question: What are your 2011 predictions?

To be honest, I do not like to make predictions.

The temptation to make predictions, however, is quite difficult to resist. In fact, making predictions is quite a human behavioral function. We are the only animal species with a fully developed frontal lobe on our brains. For better or worse, the frontal lobe is what has us constantly making plans, especially financial plans, and making predictions.

I wrote on the financial and behavioral aspects of making predictions of the future on my blog, The Financial Philosopher, one year ago:

Making predictions is a behavior deriving from the desire for control, which, in itself, is a derivative of the fear of uncertainty. Unless you were given a frontal lobotomy, the frontal lobe of your brain will naturally and continually function to make plans for (and predictions of) your future. Since a frontal lobotomy would blunt your emotions and personality, your best means of managing your miscalculations is to be aware of your own nature and, hence, to anticipate it!

When (and When Not) to Make Predictions

If you wish to make predictions of the future, it is best to do it in a way that is fun and to avoid making certain plans upon predictions that are largely uncertain. I still recall the extreme pessimism of the New Year 2009, when many economic forecasters doubted that markets would see 10,000 on the Dow Jones Industrial Average for five years or more. Well, it's been just two years and the Dow sits above 11,500 as I write this.

The problem with predictions is that they are based upon what is known now. This knowledge is also intertwined with human emotion and the tendency for pattern recognition. If, for example, the financial markets are negative for several months in a row, as they were in 2008, the pattern recognized, and thus the predictions, for 2009 would be (and were) negative. Now that we've had two years of generally positive stock price movement, how many predictions will we see for 2011 that are negative? I haven't seen any yet.

Focus on What is Within Your Control

Once again, go ahead and have fun with your predictions. Just don't base your life and finances upon them. In the realm of personal finance it is best to focus on things that are within your control, such as your savings rate (how much you save), asset allocation (selection of diverse investments), and time allocation (what you do with your time).

Kent Thune is a Certified Financial Planner™ and owner of an independent, "fee-only" investment management firm in Mount Pleasant, SC. Kent is also a freelance writer. To read more of his work or to find out how to contact Kent, please visit his blog at The Financial Philosopher. Have a question? Email AsktheAdvisor@savings.com.

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