At this time of year, the finance industry undertake a couple of rituals.

Firstly, they announce the annual returns. This means then dissecting those returns and why the market did whatever it did.

Secondly, they then proceed to announce their predictions for the following year.

This is where we see an example of some of the biases, in this case attribution bias. Attribution bias is where we attach specific actions or events to an outcome. In markets, attribution bias is prominent with fund managers who in one year beat the market. We attribute that to their skill rather than luck. If they consistently outperform there may be some skill but often these managers fade. And another takes over.

In the first case they choose specific events and link them to the final outcome, but the link most likely has zero correlation. You often see those long term stock charts starting in, say 1920 and listing the prominent events at certain points on the chart. Many of these events are well known, but they don’t have much of a connection to the stock market.

For example, I often see the Korean War highlighted as an event in a chart spanning 80 years making with other events. It should be obvious that other than a few years, the war doesn’t have an impact on the whole of the 80 year period.

If you look at a chart of 80 years, you want to understand not those events that last a few years, but those events that influence stock markets over the whole period.

Events come and go, but one common and consistent long term indicator is valuation. It is much easier to see the impact valuation has on the market as opposed to individual events. Individual events may have an impact but their influence may be short lived and not especially relevant if you have a long term timeframe.

So keep this in mind when reading interpretations of 2024 events. The question is - will it have a lasting impact or influence on my portfolio for my chosen time frame.

This desire to see cause and effect between specific events and broader outcomes leads to the second bias which is recency bias. Many predict further stock markets gains for 2025 especially for US markets because the last 2 years have been positive and so the belief is the good times will continue.

Again, they may well continue but valuations are extremely high. Whether 2025 turns out to be good or bad, there is no doubt one event or a series of events that will be interpreted as the cause of the rise or fall.

Our chances of selecting or predicting these events are nearly zero. The good news is it doesn’t matter. The key to successful investing over the long term is valuation.

So don’t spend too much time trying to predict events. Spend more time on thinking about valuation levels and how to manage or adjust your portfolio for long term returns.