Cause and Effect of the Markets?

Causation is the relationship of cause and effect. We live in a world where we want to believe that most things have a cause and effect and we are always searching for the absolute understanding of why things occur.

Trails of waterDo we do this to simplify the reasoning behind why things occur? or

Is it that we need to believe that if we just monitor the cause we can dictate the outcome?

The danger lies in the simplification process. There are many times that the cause cannot be certain. Though it may seem that the outcome was from one cause, the truth may lie in the fact that a number of things occurring together affected the outcome. Change one component slightly and it alters the outcome.

Many sports fans including my husband believe they can influence the outcome of a Jet game by wearing a certain jersey! If only it were that easy.

This is particularly true in the financial news industry. The media reports with certainty the cause and effect of the markets on a regular basis. The linking of the two events can be troubling for individual investors. Markets move for a number of reasons rather than just the reported cause.

This leads one to believe that if we study the news closely, we can determine the effect of the market. This is a misconception.

Jim Parker of Dimensional Fund Advisors touches on this subject in an article “Connecting the Dots”.

The alternate approach of listening to the financial media is a much saner approach. It involves a methodical and research based approach which allows you to diversify your portfolio in order to achieve your goals.

To read Jim’s full article, click here.    OTF_Connecting_the_Dots

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About Maureen Crimmins

Maureen Crimmins is co-founder of Crimmins Wealth Management and a fee-only independent financial advisor. Have a financial question? ASK MAUREEN

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