Beware of Predictions This Time of Year

Paul FennerPersonal Finance

Barry Ritholtz, financial writer and host of Masters in Business on Bloomberg Radio was recently quoted in this WSJ piece A Critical Look at Two Investment Practices which could have been titled Beware of Predictions This Time of Year.

Anyone who thinks that they know what direction the markets are heading in realistically only has a 50/50 chance of being right.  However, these probabilities can be exacerbated by a forecaster who really thinks that they will get the call right by saying the market will be up 15% or say down 15%.

Buyer beware as both Mr. Ritholtz and columnist Morgan Housel of the Motley Fool has backed up with this data point that “On average, these annual forecasts missed the actual market performance by an incredible 14.6 percentage points per year (not 14.6 percent, but 14.6 percentage points!) It is also noteworthy, Housel added, that from 2000 to 2014, the 22 strategists on average did not forecast a single down year, ever. During that period, the NASDAQ crashed 78% and the Great Recession sent the major averages down 57%. The strategists failed to anticipate any of it.”

The other point that John Kimelman goes on to note is the closest indexing that is currently going on among fund and asset managers.  “Closet indexing is the habit of running a highly diversified fund that stays close to its index benchmark yet charges the higher fees normally associated with active managers who make bigger bets on stocks based on careful analysis.”

We’ll save the fee discussion for another day but don’t get too up or down by the flood of forecasts that are sure to come your way if you read the financial newspapers or blogs any time soon.