The 50–50–90 Rule

I’m sure many of you remember Andy Rooney: journalist, humorist and a mainstay for years on 60 Minutes. He developed the 50-50-90 Rule: “Anytime you have a 50–50 chance of getting something right, there’s a 90 percent probability you’ll get it wrong.”

We should keep this rule in mind whenever we read or listen to someone predicting the direction the financial markets will head. I’ve heard a lot of predictions over the last 30 years and I’ve heard people tout that they predicted “the last market crash!” Or they correctly predicted the market would go to 20,000. The truth of the matter is that the financial markets are going to go one of two ways, up or down. So you have a 50–50 chance of being right. Toss a coin. Heads it’s up. Tails it’s down.

You can look at all the economic indicators. You can pour over all the technical data and charts of market momentum you want. And the truth is, you still can’t be for certain which direction the financial markets are going to head. The reason why is because we can’t predict the future and we can’t predict how human behavior will react to those future events.

Here’s a recent example. On election night, as it became apparent that Mr. Trump was going to win, stock futures sold off to such a level that would normally indicate a massacre for stock trading when the markets opened on Wednesday morning. Stocks actually opened up and finished the day with a 200 point gain. Stock future traders were betting that investors would react negatively to Mr. Trump’s election, but surprise!, they did not and the stock market went on a tear for the next few weeks.

Here’s an oldie but goodie to bring home my point a little more. Conventional wisdom has always said, “Don’t fight the fed.” Meaning when the fed is raising rates, it’s a bad time to own stocks and you should get out. There have been a number of times when that idea worked out. But I can find you an equal number of times, including this very moment, where the fed is raising rates and the stock market is going up.

So the moral of the story is, don’t base your investment decisions on what you hear market prognosticators saying. They have a 50–50 chance of being right. Markets can either go up or down. And they have a 90% probability of picking the wrong direction. Trust in your plan and in your advisor and always keep the 50-50-90 rule in mind.

These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

Copyright ©2017 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited. Contact Legacy Wealth Management today.