In a digital age, when past forecasts are available online, market and media professionals find it harder to hide their blushes when their financial predictions go awry. However, there are ways around that.
The ignominy that goes with making bold forecasts was highlighted in a recent newspaper article, which listed many bad calls US economists had made about 2015. These included getting the timing of the Federal Reserve’s interest rate increase wrong, incorrectly calling for a rise in long-term bond yields, and assuming an end to the commodity rout.1
For the broad US equity market, 22 strategists polled by the Wall Street Journal2 estimated an average increase for the S&P 500 of 8.2% for 2015. The most optimistic individual forecast was for a rise of 14%. The least optimistic was 2%. No one picked a fall. As it turned out, the benchmark ended marginally lower for the year.
In the UK, a poll of 49 fund managers, traders, and strategists published in early January 2015 forecast that the FTSE 100 index would be at 6,800 by midyear and 7,000 points by year-end. As it turned out, the FTSE surpassed that year-end target by late April to hit a record high of 7,103 before retracing to 6,242 by year-end.3
It should not be a surprise that if economists cannot get the broad variables right, it must be tough for stock analysts to pick winners. Even a stock like Apple, which for so many years surprised on the upside, disappointed some forecasters last year with a 4.6% decline.4
It should be evident by now that setting your investment course based on someone’s stock picks or expectations for interest rates, the economy, or currencies is not a viable way of building wealth in the long term. Markets have a way of confounding your expectations. So a better option is to have a sound financial plan in place, stay broadly diversified, and set an investment asset allocation tied to your own plan and comfortable for your risk appetite.
Of course, this approach does not stop you or anyone else from having or expressing an opinion about the future. We are all free to speculate about what might happen in the economy and markets. The danger comes when you base your investment strategy on such opinions.
In the meantime, if you insist on following forecasts, here is a list of 10 predictions you can count on coming true in 2016:
- Markets will go up some of the time and down some of the time.
- There will be unexpected news. Some of this will move prices.
- Acres of newsprint will be devoted to the likely path of interest rates.
- Acres more will speculate on China’s growth outlook.
- TV pundits will frequently and loudly debate short-term market direction.
- Some economies will strengthen. Others will weaken. These change year to year.
- Some companies will prosper. Others will falter. These change year to year.
- Parts of your portfolio will do better than other parts. We do not know which in advance.
- A new book will say the rules no longer work and everything has changed.
- Another new book will say nothing has really changed and the old rules still apply.
Like a weather forecaster predicting wind, hail, heat, and cold over a single day, you and your portfolio need to prepare for all climates.
The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better. The only sustainable approach to that uncertainty is to focus on what you can control.
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and families with their overall wealth management, including retirement planning, tax planning and investment management needs.
1. Malcolm Maiden, “The Year Market Economists Failed to See Coming,” SMH, December 30, 2015.
2. “Strategists Expect Stocks to Keep Climbing in 2015,” Wall Street Journal, January 2, 2015.
3. “Five Fund Strategies to Ride Rising Markets,” The Times, January 3, 2015.
4. “Seven Stocks to Buy for 2015,” CNN Money, December 31, 2014.