Welcome to Fix-It Friday, the podcast segment that simplifies financial strategies to help you make smarter decisions hosted by Jonathan Blau, CEO of Fusion Family Wealth. This episode explores one of the most common behavioral investing mistakes: extrapolation. Jonathan explains why recent market performance—whether exceptionally strong or disappointingly weak—doesn't predict what comes next. He breaks down the difference between recognizing patterns and assuming those patterns forecast the future, while highlighting behavioral biases like recency bias, framing bias, denominator neglect, and the misuse of mean reversion. Through real market examples and the fascinating "horse manure crisis" analogy, Jonathan shows why disciplined investors stay focused on long-term compounding instead of trying to predict short-term market movements.

What You’ll Learn:

✅ Why extrapolating past market performance can lead to poor investment decisions.

✅ The difference between mean reversion and short-term market predictions.

✅ How behavioral biases like recency bias and framing bias influence investors.

✅ Why staying disciplined is more valuable than trying to forecast the market.

Want to make smarter financial decisions grounded in clarity and confidence? Subscribe and share the Crazy Wealthy Podcast. To learn more about Fusion Family Wealth’s evidence-based investment strategies, visit www.fusionfamilywealth.com and request our current disclosure brochure.

Key Timestamps:

00:00 Introduction to the extrapolation mistake

01:20 Why strong recent returns don't predict weaker future returns

03:05 Mean reversion vs. market forecasting

04:10 Behavioral biases that influence investing decisions

06:40 Why recent performance has little predictive value

09:35 The horse manure crisis and the danger of extrapolation

11:05 Practical questions investors should ask before changing their portfolios

Key Takeaways:

🔹 Past market performance is not a reliable predictor of future returns.

🔹 Mean reversion is a long-term concept—not a short-term forecasting tool.

🔹 Behavioral biases often tempt investors to abandon disciplined investing.

🔹 Successful investing depends on consistency and long-term compounding, not market predictions.

👤 About the Host:

Jonathan Blau is the President and CEO of Fusion Family Wealth, a fiduciary wealth management firm he founded in 2013 to help families achieve clarity, confidence, and purpose with their money. With a deep focus on behavioral finance, Jonathan teaches investors how to recognize emotional biases and make evidence-based decisions that support long-term success. A sought-after speaker in wealth management, Jonathan previously held senior roles in tax and estate planning at Arthur Andersen. He holds a BS in Finance, an MS in Taxation, and an MBA in Accounting. Based on Long Island, Jonathan is active in the local business community, supports organizations such as the Middle Market Alliance and Sunrise Day Camp, and enjoys boating with his family.

LinkedIn – Jonathan Blau

Fusion Family Wealth Website

Crazy Wealthy Podcast

behavioral finance, extrapolation bias, investing mistakes, stock market psychology, investment strategy, mean reversion, recency bias, framing bias, denominator neglect, long-term investing, compounding, financial decision making, market volatility, investor behavior, Jonathan Blau, Fusion Family Wealth, Crazy Wealthy Podcast

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

And the title of today's [00:00:35] Fix It Friday is Patterns Aren't Predictions: The Extrapolation Mistake.[00:00:40]

And now, here's your [00:01:15] host.

So here's what's happening. Someone looks at the last five or six years, sees very [00:01:55] strong returns, and concludes, "Hey, returns have been really high, above average, so they must [00:02:00] now be due to go on a streak that's below average going forward. Let me change my [00:02:05] portfolio accordingly." And that sounds like analysis, but it's not.

Same insti-- st- same instinct, same trap, just [00:02:30] pointed the other direction Extrapolation is when we take a real pattern we see [00:02:35] in past returns and make the leap that it implies a predictable [00:02:40] future path, and that's the key, key word is predictable. Investors tend to do this in [00:02:45] two common ways. The first is after a strong period of recent returns, people [00:02:50] say, "We're ahead of average, so now we must be due for lower returns."

[00:03:20] So I'll give you an example. If returns were five percent for a period of time and the long-term [00:03:25] average has been 10%, you would need a period of higher returns at some point to [00:03:30] get back to that long-term average of 10%. That's a useful long-term observation. [00:03:35] But here's where things go wrong. Investors take that concept and turn it into a short-term [00:03:40] forecast.

So mean reversion tells us something about long-term outcomes. It tells us [00:04:05] nothing about what happens next, and that's where investors make the biggest mistake. [00:04:10] And this is where a few behavioral biases sneak in. So one is called framing [00:04:15] bias. It's when we cherry-pick a timeframe to make it look like the facts currently [00:04:20] support the narrative we already believe.

The last twelve months feel more real to us than the last twelve [00:04:55] years, even though they matter far less to a twenty-year plan. So we look at [00:05:00] recent periods and extrapolate from that into the future. Denominator [00:05:05] neglect, this is an important one. We treat a short window of time, meaning the [00:05:10] last five years, like it's meaningful.

Uh, the-- [00:05:30] today, they'll say that the Dow Jones is down a thousand points, and that sounds awfully scary. [00:05:35] But the denominator, which is the current level of the Dow, not just the numerator, the [00:05:40] thousand points, is fifty-two thousand. So now it's a thousand points down over [00:05:45] the denominator of fifty-two thousand.

So a two percent decline versus a five percent decline is very different, [00:06:25] but a thousand points sounds scary when they don't include the denominator, no matter what the [00:06:30] percentage is. So den-denominator neglect is, is, is a big, uh, behavioral, um, [00:06:35] foible that we need to avoid. Mean reversion misuse, turning a long-term tendency [00:06:40] into a short-term prediction.

Look [00:07:00] across rolling multi-year periods for the market going back decades. Some strong [00:07:05] stretches were followed by more strong years. Some weak stretches were followed by more [00:07:10] weak years. Others reversed entirely. There's no reliable rule that says strong [00:07:15] periods have to be followed by weak ones or the other way around.

Now we're looking at a much broader period that goes back [00:07:40] about twenty-five years rather than five or six. Over that twenty-five-year period, the [00:07:45] S&P five hundred with dividends had returned about eight percent a year. The [00:07:50] long-term average for the S&P five hundred is over ten percent a year. So using the [00:07:55] exact same logic, you could say we're behind average, so now we must be due for higher [00:08:00] returns to catch up.

Same kind of thing. [00:08:20] Extrapolating up or down leads to the same mistake. It creates a false sense that we, we [00:08:25] can predict what's about to come next, and that belief leads to decisions that can interrupt, [00:08:30] and often do interrupt, the investor's compounding. The direction of the extrapolation is [00:08:35] not what's important, but the damage that it causes is what is.

So depending upon where you start the clock, you'll [00:09:00] see a different pattern. The pattern is real, but it doesn't make the future predictable. [00:09:05] Here's the real danger. Extrapolation drives decisions, and those decisions can [00:09:10] interrupt compounding. After strong patterns, people often pull back. After disappointing [00:09:15] patterns, people Try to reposition.

It was a [00:09:40] growing problem and actually considered to be an existential crisis, and it was called [00:09:45] the horse manure crisis of the 1890s. Everything depended on horses. Experts looked [00:09:50] at that pattern. The-- more horses every year, horses for taxi cabs, horses [00:09:55] for buses, horses for, uh, farming, et cetera. You name it, there were horses doing, [00:10:00] uh, doing most of the heavy duty tasks.

It was shut down in a matter of days because the entire [00:10:30] consortium who was debating it deemed that the problem was unsolvable. They [00:10:35] saw the pattern correctly. They were just wrong to assume it would continue [00:10:40] indefinitely. What they didn't see coming was the automobile, Ford and [00:10:45] Daimler. And just like that, the problem disappeared.

The next time you hear returns have been high, so they must be lower going forward, or [00:11:10] returns have been low, so now's a good time to increase my exposure to equities 'cause they're gonna be higher, [00:11:15] just pause and ask yourself a few things. Am I observing a pattern or am I [00:11:20] projecting it forward? What timeframe is being emphasized and why?

At Fusion, we [00:11:45] actually believe strongly in using history as a guide, but in the right way. [00:11:50] History teaches us the nature of markets, that declines happen, volatility is normal, and [00:11:55] that long-term ownership has been rewarded over time. What history doesn't give us is [00:12:00] a reliable way to predict the next six, twelve, or even twenty-four months, [00:12:05] especially when we cherry-pick a timeframe to support a narrative, because that's the real [00:12:10] trap.

[00:12:30] Thanks again for tuning in. Uh, you can catch us on [00:12:35] crazywealthypodcast.com, fusionfamilywealth.com, and all your favorite podcast venues. Until [00:12:40] next time, have a great weekend.

Disclaimer: The previous podcast by [00:13:05] Fusion Family Wealth LLC, Fusion, was intended for general information purposes only. No portion of the podcast serves as the receipt of, or [00:13:10] as a substitute for, personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve [00:13:15] varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non-investment related or planning [00:13:20] services, discussion, or content will be profitable, be suitable for your portfolio or individual situation.

No portion of the video content should be construed by a client or prospective client as a guarantee that he or she will experience [00:13:40] a certain level of results if Fusion is engaged, or continues to be engaged, to provide investment advisory services. A copy of Fusion's current [00:13:45] written disclosure brochure discussing our advisory services and fees is available upon request or at [00:13:50] www.fusionfamilywealth.com.