From how the dollar will perform, to whether we should invest in property or shares, despite the past record of forecasters often ‘getting it wrong’, or playing it safe, consumers will continue to seek market predictions, almost as if they are searching to find that one person with the crystal ball.
Using last year as an example, many experts, including Mike Wilson from Morgan Stanley, predicted tech stocks would continue to head the market, allowing it to remain strong. What happened? The likes of Apple and Facebook fell over 40% from their highs. Even the S&P 500 ended the year well below the predicted 2840 with a concluding result of 2500.
So why are the experts so often wrong? To put it simply, it’s because they generally fall into two categories, and either way, they are playing it safe.
Typically, the first kind of forecaster works for large investments banks, and therefore not incentivized to make market predictions too far from the average 5-10% that is ordinarily expected from the market as an annual growth. These forecasters are often safe in their packs, as they all make similar predictions. In the cases of 2008 and 2018 where these forecasters ‘got it wrong’ as the markets ended lower than expected, there is no single predictor that stood out in this group, therefore their jobs remained safe, which all along is their main motivator.
The second type is more your ‘dooms dayers’. These forecasters continuously predict a crash in the market, obviously they are correct every so often, however they fail to mention that they forecast a bear market year after year. These dooms-dayers can be dangerous to any future investor, especially one who doesn’t have a financial adviser who has the knowledge and expertise to rationalize these predictors and talk a future investor ‘off the ledge’ of being too frightened to invest at all, potentially saving them tens of thousands of dollars over their lifetime.
So, the bottom line is that forecasters hope the investor has a short memory. In other words, those that are motivated to cast more optimistic predictions rely on the public not remembering that 1 out of ten years they may have gotten it wrong. They also rely on the consumer forgetting to reason with the certainty that markets, in the short term, can’t be predicted, with 100% accuracy. There would be a lot more Warren Buffets if that were the case. These experts fail to recognize the fact that they don’t have a crystal ball and therefore have limitations within their expertise.
Forecasting is often an important part of their sales pitch; their businesses rely on making regular active investment decisions.
So why does the average consumer take the word of a market forecaster? Mostly because it is human nature to take comfort in knowing that there is a type of security, especially where personal comfort is involved. By playing it safe, and being mostly correct as a result, people are kept interested. Rather than accepting that markets are inherently unpredictable, ‘unexpected’ events are blamed when a prediction has gone awry.
Prepare or Predict: The Kofkin Bond approach
Investors don’t need to make predictions to be successful in the market, however, being prepared could save the investors a lot of anxious moments as well as thousands of dollars over the course of their portfolio.
Warren Buffet once declared “never ask a barber if you need a haircut.” In other words; a realtor will always tell you how the housing market is continuing to grow, a stockbroker will tell you how the stock market is the place to invest and the newspapers will tell you any sensational story to sell a paper etc. It can be overwhelming when there are many contradicting predictions, all advising the investor on the best place to invest.
Preparation negates prediction. It is having a well-balanced portfolio that can be re-balanced when required to ensure our clients remain ahead in times of uncertainty. Preparing, and having realistic expectations of a range of possible outcomes, is key to success. Ensuring our clients aren’t overexposed in one area helps to safeguard their interests and having the patience for long term investment ideas ensures that when the market turns bear there is less need to panic.
So, in sort, our best strategy that we advise our clients on is to invest in a broad mix of assets rather than individual stocks, keep costs low and rebalance periodically. Avoid the temptation to override your strategy due to predictions, have a little faith in a long-term strategy.