“Given what’s happening in the world, should I change my investments?”
It’s a question almost every investor asks at some point. Maybe there’s turbulence in the market, alarming headlines about the economy, or a big election around the corner. The gut reaction is often to adjust your strategy based on current events – to do something in response to the news. After all, isn’t that being a responsible investor, staying on top of things?
In reality, successful investing is usually more about sticking to sound principles than making bold predictions. This might sound counterintuitive in a world obsessed with forecasting the next big trend or dodging the next crash. But as we’ll explore in this post, a principles-based approach tends to outperform a predictions-based approach in the long run. Let’s break down why.
When it comes to managing your portfolio, there are essentially two competing philosophies:
Let’s look at each philosophy in a bit more detail.
We’ve all felt the allure of prediction-based investing. It promises a sort of control: if you can just predict what’s next, you can avoid losses and capitalize on gains. This often means timing the market – jumping in or out of asset classes based on economic signals or reacting to the latest news headline. For example, if there’s talk of an upcoming recession, a prediction-driven investor might sell stocks preemptively. Or if a particular stock is all over the news for a great new product, a prediction investor might rush to buy, assuming the price will skyrocket.
This philosophy treats investing like a series of short-term bets. Every news event or market forecast becomes a call to action. It’s exciting and dramatic: you’re constantly doing something – selling, buying, rotating between sectors – all in an effort to stay one step ahead of the market.
However, as we’ll see, this approach has a big challenge: you have to be right an awful lot, and that’s extremely hard to pull off.
In contrast, a principles-based investor sticks to a plan rather than constantly making predictions. The focus here is on long-term strategies that are designed to work over many market cycles. Instead of asking “What’s the market going to do this month?” a principles-based approach asks “What strategy will serve me well over the next 10 or 20 years, regardless of what happens this month?”
Key principles might include:
Investing based on principles might not sound as exciting as chasing the latest hot stock or ducking in and out of the market. In fact, it can seem downright boring at times. But “boring” is not a bad thing in investing – boring is steady, boring is predictable (in the behavioral sense), and boring tends to work.
Why do so many of us feel tempted to base our strategy on predictions? Market timing, in theory, sounds like the ideal – who wouldn’t want to sell right at the peak before a crash and then buy at the exact bottom? The very idea is seductive. It’s like thinking you can hit every green light on your drive if you just time it right.
There’s also a psychological rush in trying to predict the market. It makes investing feel like a more active endeavor – you’re doing something and possibly feeling a sense of control in an uncertain world. Headlines blare “Market Plunges on Pandemic Fears – Is Worse to Come?” and you think, “I should protect myself, I see what’s coming.” Or you read “Tech Stocks Hit Record Highs” and feel the urge to jump on board before missing out.
Let’s be honest: acting on predictions can feel rewarding in the short term. If your hunch was right even once, it’s very reinforcing. Say you sold before a downturn last year – you might now feel like a genius, confident you can do it again. This overconfidence bias creeps in, and suddenly you believe you can consistently outsmart the market. (Spoiler: even the best investors in history only get it right a fraction of the time, and even they caution against trying to time the market.)
The fear of losses also tempts us into prediction-based moves. We hate seeing our portfolio value drop, so the moment things look shaky, the instinct is to sell now and “avoid further pain.” On the flip side, greed and FOMO (fear of missing out) tempt us to chase trends – if everyone is raving about cryptocurrency or meme stocks, we feel we should buy because maybe that’s the next big thing.
The problem is that while timing the market once might be doable by luck, doing it consistently is nearly impossible. To succeed with a predictions-based strategy, you have to make not just one good call, but a string of good calls. And not only do you need to predict the event (e.g., that a pandemic will hit, or an election outcome), you also have to predict the market’s reaction to that event, which adds another layer of difficulty. We’ll explore that next.
Before we move on, consider this finding from the Schwab Center for Financial Research: they examined different approaches to investing a lump sum of money each year – one person had perfect timing every year, another invested immediately without timing, and others waited in cash. The conclusion? “Our research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing… because timing the market perfectly is nearly impossible, the best strategy for most of us is not to try to market-time at all.”
In other words, even if you somehow got it perfect once or twice, the missed opportunities while waiting are likely to outweigh those wins.
Even if you could accurately predict a news event or economic development, there’s another catch: the market’s reaction might defy expectations. Time and again, the stock market has reacted to major news in unpredictable ways.
Think about some recent surprises:
What these examples highlight is that the correlation between world events and market outcomes is not straightforward. Markets price in not just the event, but the expectations around the event, policy responses, and countless other factors. By the time you read a headline, a lot of smart people have already reacted, and sometimes the market’s move preceded the headline (buy the rumor, sell the news, as the saying goes). Other times, the market just goes in a totally opposite direction than logic would dictate, at least in the short run.
History provides even more reassurance that staying the course is wiser than panicking over news. Amundi Asset Management looked at 25 major international crises since 1940 – wars, political shocks, and other tragedies. The average immediate market drop during those crises was about 6% (some more, some less). Yet in all but four cases, the market was back to positive territory within six months of the initial drop.
This has held true for events like the Cuban Missile Crisis, the assassination of JFK, and so on – events that shocked the world, but where the market’s downturn was relatively short-lived. For instance, during the Cuban Missile Crisis (a true moment of global peril), the Dow rose 1.1% during the crisis period and was 24% higher six months later.
The lesson: the market often heals from shocks faster than our emotions do.
All of this reinforces a core argument: since you can’t reliably predict what will happen, and you definitely can’t predict how the market will respond, a strategy that doesn’t depend on accurate predictions is the safer bet. That’s where principle-based investing shines – it’s built to endure the unpredictable.
So far, we’ve talked conceptually about why a principles-over-predictions approach makes sense. But you might be thinking, “Show me the data.” Fair enough! There is a wealth of research comparing active, prediction-driven investing to passive, principles-driven investing. The results consistently favor the latter.
One of the most striking pieces of evidence is the flow of money over the last decade. Investors have been voting with their feet, so to speak. In the past 10 years, over $2 trillion has shifted from actively managed funds to passive index funds.
This massive migration reflects dissatisfaction with high-fee active managers who often failed to beat the market, and a growing appreciation for low-cost index investing. In fact, by the end of 2021, passive index funds actually overtook active funds in total U.S. stock ownership for the first time (16% of the market held by passive funds vs. 14% by active).
Investors are embracing the principle of “if you can’t beat ’em, join ’em” – since most active funds don’t beat the index, why not just invest in the index?
And it’s not just flows; it’s performance. Consider the regularly published SPIVA reports (S&P Indices Versus Active). They compare active mutual fund managers to their benchmark index over various timeframes. The data is brutal for prediction-based active strategies:
Let that sink in: virtually no category of active funds showed persistent outperformance in the long run. It didn’t matter if markets were booming or crashing; the “principle” of low-cost passive investing kept winning out over the “predictions” of expensive active managers.
It’s also telling to see what happened when Wall Street’s brightest minds faced off against a simple principles-based approach. A great example: Warren Buffett’s famous $1 million bet. Buffett bet that over 10 years, a low-cost S&P 500 index fund would beat a basket of hand-picked hedge funds (which use all sorts of predictive strategies to try to outperform). The result? The index fund crushed the hedge funds. By the end of the bet, Buffett’s chosen index fund delivered about a 7.1% annual return versus roughly 2.2% annual return for the hedge funds
And these hedge funds were run by top professionals with every resource at their disposal! If even they couldn’t beat a simple principles-based index strategy (after their hefty fees, that is), it’s a strong sign that prediction-driven investing is an uphill battle.
It’s no wonder, then, that individual investors are increasingly choosing index funds and ETFs that follow set principles (like tracking the whole market) instead of trying to pick the next winner. The data suggests that not trying to constantly predict the market’s twists and turns leads to better results on average.
At this stage, it’s worth addressing some common objections we hear in favor of active, prediction-based investing. After all, if nobody could ever beat the market, the industry of active management wouldn’t exist. There are indeed arguments proponents make – let’s tackle a few:
Objection 1: “Some people do beat the market, so active investing can work.”
It’s true; there are always a handful of fund managers or investors (like Warren Buffett himself) who have long-term records of market-beating returns. The argument is that if they can do it, maybe you or a manager you pick can do it too. The flaw in this logic is something called survivorship bias. Out of thousands of active investors, by pure chance alone some will outperform in any given period. The real question is whether you can identify in advance which ones will keep outperforming. The SPIVA data we discussed showed that very few maintain their outperformance over multiple periods – yesterday’s star fund often becomes tomorrow’s disappointment. In fact, many studies (and real investor experiences) show that chasing last year’s winning fund often leads to underperformance, because that fund might regress to the mean.
It’s also worth noting that some of those exceptional investors who did beat the market, did so by sticking to their own principles (often very long-term, disciplined approaches) – not by constantly reacting to news. Buffett, for example, famously avoids trying to time the overall market and instead focuses on the intrinsic value of individual businesses (a principle-driven method). So yes, active success is possible, but it’s so rare and unpredictable that for most investors, it’s not a reliable strategy.
Objection 2: “Active managers can adapt to changing conditions, indexes just hold everything (even the bad stuff).”
This is an argument that in tough times, a skilled active manager can reduce exposure to sectors or stocks that are poised to do poorly (say, avoid airlines during a pandemic, or avoid tech during a dot-com bust). Meanwhile an index just blindly holds whatever is in the market, good or bad. In theory, this adaptive ability sounds great. In practice, very few managers got out of toxic assets before 2008, or out of high-flying tech before 2000. Those that did one of these successfully often failed to get back in or missed the next rotation. The flexibility of active management is only an advantage if used correctly, and statistically, most don’t use it well consistently (recall that ~95% 5-year underperformance stat). Furthermore, the index’s “bad stuff” often falls and then gets replaced or rebalanced naturally – whereas an active manager might sell losers after they’ve plunged (too late) or cling to thesis-driven bets that never pan out. In short, the theoretical edge of adaptability is rarely realized in long-term data.
Objection 3: “This time is different – I know what’s coming.”
Every era has its convincing narrative. “Interest rates are zero forever, so stocks will only go up.” Or “Debt is unsustainably high, a crash must happen soon.” Or “Tech is the future, old industries will die, I should put everything in tech.” It’s easy to feel like the usual rules don’t apply because of a unique circumstance. However, betting your portfolio on a specific prediction (“__ will happen next”) is effectively putting principles aside. A principles-based investor might acknowledge that anything can happen – even scenarios that seem crazy – and thus remain diversified and balanced. If you’re certain “this time is different,” you might concentrate your bets or make drastic moves. But as the saying goes, those can be “famous last words” in investing. Often, by the time a trend is obvious, it’s priced in. And when everyone is sure about something, the opposite tends to happen. Staying humble about our ability to predict keeps us grounded in a principle-driven plan.
A rules-based, principles approach acts as a safeguard against those biases by taking a lot of decision-making (and second-guessing) off your plate.
If there’s one message to take away, it’s this: build your investment strategy on principles, not on short-term predictions. The market will always have surprises – some pleasant, some not – but if you have a solid plan, you won’t need to scramble every time a new headline hits.
Principles like diversification, steady investment, and patience may not make news, but they have a proven record of helping investors reach their goals. Predictions and market-timing, on the other hand, more often lead to stress and disappointment. As we’ve seen, even professionals struggle to predict consistently or beat the market; expecting that of ourselves is a tall order (and unnecessary to boot!).
So next time you find yourself worrying about an election, a Fed meeting, or any market-moving news, take a deep breath. Rather than ask “How can I dodge or capitalize on this event?” ask “Does my long-term plan still make sense given my goals? Have my principles changed?” Chances are, the plan is still sound and the best course of action is to stay the course. Maybe rebalance if something has drifted significantly, but don’t abandon your strategy because of fear or excitement.
Investing based on principles means you’re in the driver’s seat with a map, not white-knuckling the wheel every time you hit a bump. It means trusting the process, knowing that while you can’t control or predict the markets, you can control your own behavior and strategy. And that, ultimately, puts the odds of success in your favor.
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Disclosure: This post is for informational purposes only and should not be considered investment advice. Past performance is not indicative of future results. Please consult a qualified financial professional before making any investment decisions.
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