Beat Market Forecasts by Ignoring Them
The end of December through early January in the financial industry is forecasting season – the time of year when market “experts” tell the media how they believe markets will perform over the next 12 months.
Unfortunately, most of what is said is more hype than substance. In fact, the majority of market forecasters are proven wrong.
CXO Advisory Group, a market research firm, studied 6,582 forecasts made by 68 experts about the U.S. stock market from 2005 through 2012. It found that the aggregate accuracy of their forecasts was 47.4% – less than the odds of choosing heads or tails while flipping a coin. If you had made investment decisions based on the opinions of these experts, the majority of the time you would have lost.
Market commentators have plenty to prognosticate about for 2015, including: whether or not the current bull market will continue; when the Federal Reserve will raise interest rates; the effect of low oil prices; the strength of the U.S. dollar; deflationary pressures on eurozone economies; the performance of emerging markets. Yet, there is no evidence forecasts are more reliable this year.
The historical inaccuracy of market forecasts isn’t the only reason to take them with a grain of salt. In many instances, media outlets ask financial professionals their opinions and they simply oblige; they are not necessarily trying to provide actionable advice.
Those that do seek to make bold predictions likely do so for the publicity more than anything else. Whether right or wrong, they raise their profiles and the profiles of the companies they represent while their predictions are eventually forgotten.
Ultimately, yearly forecasts are best ignored because they attempt to foretell the outcomes of short-term market events, which should have no bearing on your long-term investment decisions.
In the near future, any number of unpredictable events can occur that affect market conditions. Over the long term, however, markets should behave within certain reasonable expectations. For example, in general we can expect riskier assets such as stocks to generate higher returns than less risky assets such as bonds. But, in any given year, that may or may not be the case.
Therefore, investors with long-term goals such as retirement are better off making decisions based on long-term characteristics rather than potential outcomes of short-term market events.
Your personal situation provides more insight into how you should invest than the opinions of market experts. Let’s say you have enough money to meet your financial needs and withstand inflation. In that case, you need not worry about future projections of market returns because you could put your money in low-risk investments and leave it alone.