Happy New Year! The telltale signs of the New Year are all around us. One of the classic New Year’s resolutions we hear about is someone’s renewed commitment to improving their health or to losing weight. If you belong to your local YMCA or have a gym or health club membership, you no doubt have seen a lot of new faces the past few weeks. Don’t make too much of an effort getting acquainted with your new gym mates, however. If history is any indication most of these new members will disappear by March, or perhaps they will last until April if they have stronger resolve.
The new year also provides us with an ample amount of economic forecasts and financial market predictions from a variety of “experts.” What makes these people qualified to provide forecasts and predictions isn’t always easily determined, however. Chances are you have stumbled across an article or two recently that provides you with some advice on which stocks to buy or sell, or perhaps a web video telling you what market segments should outperform the rest of the stock market this year. But should you utilize these forecasts and predictions in your financial planning or investing efforts?
There is an old joke that applies here. “What do you call an economist with a forecast?” The answer, of course, is “Wrong.” And history once again shows time and again, how frequently the “experts” get it wrong. Consider these examples from late 2012 and early 2013.
Barron’s cover story from November 12, 2012 asked the question “Are We Headed for a Recession?” The answer for 2013 was a resounding “NO!” Not to be outdone, two weeks later Time Magazine’s November 26, 2012 issue contained an article “Why Stocks Are Dead, and Bonds Are Deader” featuring PIMCO’s CEO and co-CIO Mohamed El-Erian and co-CIO Bill Gross. Considering their prognosis for the equity markets, it is a good thing that Messrs. El-Erian and Gross are not medical doctors! And in late 2012, a longtime Forbes magazine columnist predicted a 42% decline in the S&P 500 Index based on a long list of concerns, including government deficits, unemployment, weak consumer spending and housing foreclosures.
It’s not only the media who get forecasts wrong. Wall Street insiders also routinely get it wrong. In early January of 2013, a group of Wall Street’s “experts” (leading market analysts, fund managers, etc.) arrived at a consensus predicted return for the S&P 500 Index of +8.2% for all of 2013, according to Birinyi Associates, a stock market research and money management firm. How did the S&P 500 Index actually perform in 2013? The S&P 500 gained 32.39% in 2013, or almost four times the consensus prediction from the group of “experts” from Wall Street.
Financial and economic forecasts and predictions aren’t a new phenomenon, unfortunately. Consider Irving Fisher, considered by some to be the first “celebrity” economist. Fisher was regarded by some fellow economists to be one of the greatest economists that America produced; but one unfortunate prediction tarnished his reputation for the remainder of his life. Fisher announced publicly just days before the stock market crash of 1929 that the stock market had “reached a permanently high plateau.” Fisher’s reputation never recovered from his disastrous prediction.
So why then do so many investors still pay attention to the predictions and forecasts of economists, stock pickers and market timers when history shows the futility of these efforts? Many people still believe that there are experts and gurus that exist that can predict and forecast the future, and they simply have to find the right guru and they will be on the road to riches. After all, in most other endeavors in life, the harder you work at something the better you get. Tiger Woods wasn’t born with his great golf swing, he has spent countless hours perfecting it. And how many hours have Michael Jordan or LeBron James spent in the gym or playground perfecting their shooting and dribbling skills?
But the overwhelming evidence shows that predicting the future is difficult, if not impossible. Year after year, markets surprise the “experts” either by outperforming or underperforming their predicted results. Mutual funds managed by stock pickers and market timers fail to consistently outperform the market index year after year. Sure they can get lucky for one or two years, but inevitably their luck runs out, leaving investors with lackluster returns and avoidable losses. And not only is it difficult to predict the future movements of the market, it is even harder to predict how other investors will react to these unpredictable events and market gyrations, making the effort even more difficult.
It has been said that “an investment strategy that relies on predictions and forecasts isn’t much of an investment strategy at all.” In reality, investing based on market and economic predictions is more akin to gambling. How many of you would take your hard-earned 401(k) account to the nearest casino or racetrack upon retirement? I’m betting, no pun intended, not many of you would engage in such a foolish activity.
This year resolve to let go of the prediction addiction and embrace disciplined investing strategies. Work with a trusted advisor to craft a disciplined, low-cost investment strategy that will move you closer towards your financial goals regardless of what the markets bring in 2014. Nobody knows how the markets will perform in 2014, but more often than not, financial markets reward investors for their discipline and patience.