BY WEALTH ADVISER
Most investors secretly hope to find the person or process that can reliably call what happens next in markets. Yet the evidence is overwhelming: even trained experts are far worse forecasters than they think, and financial markets are harder to predict than most things in life. If that is true, the most realistic way to invest is to assume you are probably wrong about the future, and then build a portfolio that can still succeed.
A recent study by Dartmouth academic Jeffrey Friedman tested more than 63,000 judgments from almost 2,000 national security officials across NATO countries. These experts were asked to assign probabilities to factual statements and future events, such as whether NATO spent more on defence than the rest of the world, or whether Russia and Ukraine would agree a ceasefire by a specific date. When officials said they were 90% sure something was true, they were right only a little over half the time; when they were absolutely certain they were wrong, they were still wrong themselves in about a quarter of cases. Joe Wiggins, a UK investment researcher, uses this study in his Firstlinks article “Invest like you are bad at making predictions” to make a simple point: if highly trained national security professionals cannot calibrate probabilities well, everyday investors should not expect to do better with sharemarkets.
What overconfidence does to your money
Wiggins notes that investing often looks like a predic‑ tion game. Financial commentary is full of confident calls about rates, inflation, elections and share prices, while many investors treat geopolitics as a chance to play foreign policy expert for a week. His argument is that this is exactly the wrong place to lean into your views: the Friedman study shows that even people whose careers depend on understanding global threats routinely make overconfident, poorly calibrated judgments. If the experts are this unreliable, what are the odds that a generalist investor, skimming headlines between meetings, can time markets based on their take on Russia, China or the US election?
Behavioural‑finance research backs this up. Studies of retail investors consistently find that overconfidence is one of the most damaging biases, leading people to overestimate their skill, underestimate risks and trade far more than is sensible. Academic reviews of retail trading behaviour show several common patterns: chasing recent winners, concentrating portfolios in a handful of ideas, reacting strongly to news that fits existing beliefs, and selling after falls rather than rebalancing. A Fidelity Australia insight on overconfidence notes that these behaviours often leave investors earning less than the very funds or indices they invest in, because their timing decisions subtract value.
Wiggins also stresses that markets are even harder to predict than the foreign‑policy questions in Friedman’s work. Those questions were specific and relatively narrow; markets, by contrast, reflect the constantly shifting interactions of millions of participants, economies, policies and technologies. If officials struggle to estimate the odds of a ceasefire, how realistic is it for an investor to predict where the ASX or the S&P 500 will be in six months, or how quickly the Reserve Bank will cut rates? Accepting that limitation is not defeatist; it is the starting point for a better process.
Think like you’re bad at predicting
If you accept that your predictions are likely to be off more often than you think, the next step is to adjust your mindset and behaviour. Wiggins suggests a simple rule of thumb: whenever you express a strong market view, mentally reduce your confidence level. If you feel “90% sure” that rates will fall faster than expected, behave as though you are only moderately confident; if you are “certain” a particular stock is cheap, remind yourself of Friedman’s finding that even absolute certainty was wrong one in four times. This kind of internal discounting makes it less likely you will take extreme bets based on a story that just happens to feel compelling.
He also recommends avoiding investment approaches that depend on finely tuned forecasts. For example, strategies that try to jump in and out of shares every time there is new economic data, or that lean heavily on geopolitical calls (“I’ll go to cash until this conflict is resolved”) are especially vulnerable to our forecasting flaws. Instead, he argues for “easier” predictions: that over the next decade, diversified sharemarkets have a decent chance of beating cash after inflation; that over very long periods, owning productive assets like businesses and real estate has usually been more rewarding than holding only money in the bank. These broad statements are still uncertain, but history gives more support to them than to highly specific, short‑term calls.
Cromwell’s rule—named after Oliver Cromwell’s plea to “think it possible you may be mistaken”—is particularly useful here. In practical terms, it means never acting as though your view about markets, politics or the economy is 100% right. For advisers and clients, that can translate into simple steps: write down your expectations with explicit probabilities; consider at least one alternative scenario for every big decision; and ask “what if we are wrong?” before changing a portfolio. The point is not to paralyse yourself, but to ensure your decisions build in the possibility of error.
If you accept that your predictions are likely to be off more often than you think, the next step is to adjust your mindset and behaviour. Wiggins suggests a simple rule of thumb: whenever you express a strong market view, mentally reduce your confidence level
From prediction to process
Because humans are naturally overconfident, Wiggins describes diversification as “an exercise in humility”. If the future is uncertain and we know we are bad at guessing it, the logical response is to spread our risks rather than backing a few strong hunches. For Australian retail clients, that means diversifying across asset classes (shares, bonds, cash and, where appropriate, property), across regions (Australia, global developed markets, selected emerging markets) and across investment styles (growth and value, large and small companies), rather than putting most of their money into whatever seems most convincing right now.
Academic work on retail investors supports this shift from prediction to process. Reviews of behavioural biases and investment outcomes find that structured approaches— such as regular saving plans, broad index funds, and simple rebalancing rules—tend to outperform frequent, forecast-driven trading once costs and timing mistakes are taken into account. ASIC has also drawn on behavioural economics to explain why many consumers struggle with complexity and choice overload, often defaulting to short‑cuts or marketing messages instead of considered decisions. A clear, repeatable process helps counter these tendencies by reducing the number of ad‑hoc decisions made under stress.
For advisers, Wiggins talks about focusing on “closing the behaviour gap” between what markets deliver and what clients actually experience. That means building portfolios and advice processes that assume setbacks, volatility and surprises, so clients are less likely to abandon the plan at the worst possible moment. Instead of trying to find the perfect prediction, the emphasis shifts to designing a good, boring process and sticking to it.
Simple, practical steps for Australian investors
Translating this to the day‑to‑day decisions of Australian households leads to a handful of practical steps. First, set realistic expectations. Over a decade, a diversified growth portfolio will almost certainly have some years of negative returns and gut‑churning drawdowns, even if it ultimately delivers solid growth above inflation. Being mentally prepared for that makes it less likely you will treat every downturn as a sign your strategy is broken.
Second, cap your conviction in any one idea. Instead of letting a single stock, sector, theme or fund grow into a very large part of your portfolio, agree sensible limits with your adviser and rebalance when those thresholds are breached. This applies equally to the “sure thing” stock pick and to macro calls like “rates can only go down from here”.
Third, pre‑commit to a rebalancing and review process. Decide in advance how often you will review your portfolio, under what conditions you will trim winners or top up losers, and when you will choose to do nothing. Writing this down reduces the temptation to react to every headline or market swing.
Fourth, simplify your prediction task. Rather than trying to pick the next hot sector or time the exact bottom, focus on decisions you can control: how much you save, how much risk you take relative to your goals and time horizon, how widely you diversify, and how much you pay in fees and tax. These factors often have more impact on long‑term outcomes than any single forecast.
Finally, treat diversification as a statement of humility. When you and your adviser spread your investments, you are implicitly admitting that neither of you knows which asset or region will win next—and that is healthy. Building a portfolio on that foundation allows you to be “probably wrong” about many specific things while still being broadly right about your financial future.
For Australian retail clients, this approach can feel less exciting than bold predictions, but it is far more likely to preserve and grow wealth over time. Embracing uncertainty, lowering your confidence and committing to a simple, disciplined process is not a sign of weakness; it is what sensible investing looks like in a world where even the experts get it wrong.
References
• Joe Wiggins, “Invest like you are bad at making predictions”, Behavioural Investment / Firstlinks, 25 November 2025.
• Jeffrey A. Friedman, “The World Is More Uncertain Than You Think: Assessing and Combating Overconfidence Among 2,000 National Security Officials”, Texas National Security Review, 30 October 2025.
• Fidelity Australia, “Behavioural finance: Overconfidence”, 14 January 2025.
• “Behavioural Biases and Their Impact on Retail Investment Decisions”, Journal articles on retail investor behaviour, 2024–2025.
• Joe Wiggins, “How to avoid the behaviour gap in investing”, 2 June 2025.
• ASIC, “Explanations based on behavioural economics”, Report 427, March 2015.
