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Year-End Market Forecasts: There Is No Crystal Ball



As an investment advisor, the question I get asked the most is, "What do you think will happen in the market?" Essentially, I am being asked to predict the future. It makes for an interesting conversation, but I never make any strong predictions. With year-end just around the corner, you will begin to see annual market predictions of pundits and market analysts for the upcoming year. Let me tell you why the investing gurus like to make predictions, why you should ignore them, and most importantly, what you should do instead.

Why the Gurus Like to "Predict" the Future

People like to know what kind of weather we will be having and will watch weather forecasts every night. Likewise, they like to know which sports teams are "supposed" to win and will watch sportscasters give their analysis and predictions of upcoming games. Of course, people would also love to know what the stock market is going to do and will listen to the gurus make their predictions on the markets. Market analysts know that people love certainty. The gurus try to fill people's need for certainty by predicting what the market is about to do. Of course, they make their predictions seem logical, using current or past economic or market data in order to lend them validity. They provide a false sense of security in what can sometimes be a nerve-racking endeavor.

Pundit predictions also tend to be exciting. You will never hear a statistically responsible prediction such as, "I predict that over the next six months, the Dow will rise at its historically average rate of about 4% before dividends." If gurus simply give boring predictions, they would not generate the word-of-mouth advertising needed to promote their business - for this, they must create a buzz.

Why You Should Ignore Market Analyst Predictions

  1. Consistently predicting the future is impossible. Simply put, unless you have the DeLorean time machine from Back to the Future, nobody knows what is going to happen tomorrow or next week or next year.

  2. Flipping a coin has better odds of being accurate. Larry Swedroe, director of research for The BAM Alliance, has conducted studies on these annual market forecasts each year since 2010. By his count, only 32% of the "sure thing" analyst forecasts came true.

  3. Which one do you believe? With so many investing gurus giving very different predictions, how do you know which one to believe? What typically happens is something called confirmation bias - a type of cognitive bias in which people seek out information that confirms their existing beliefs. For example, if you believe there is a bear market coming, you will pay more attention to bearish forecasts.

  4. Even the "experts" don't know. After the Federal Reserve's December 2018 meeting, Fed Chairman Jerome Powell said he expected the Fed to raise rates two more times in 2019. Even his forecast has been wrong - not only has the Fed not raised rates, but it has actually lowered rates in 2019.

  5. The Blind Squirrel Theory. In March, an article in the Arizona Republic declared that the Old Farmers Almanac got it right when it predicted in September that southern Arizona would have a cold and snowy winter. The month of February did, in fact, have lower than average temperatures and higher precipitation. However, you never see articles written about all the times the Old Farmers Almanac is wrong (about half the time, in case you were wondering). Likewise, market analysts like to boast about the times they were right. Obviously, anyone can make accurate predictions at least some of the time (32% in the BAM Alliance study above). Even a blind squirrel finds a nut once in a while. But, loudly bragging about it doesn't make the squirrel any more likely to find future nuts.

What You Should Do Instead

If you have read any of my past articles, you probably can "predict" what I am about to say. Rather than listen to the investing gurus and try to time the market based on their predictions, create a long-term investment plan. Diversify your portfolio and modify your risk based on your personal comfort level and financial goals. Stick to a smart buy-and-hold strategy tailored for you and ignore crystal-ball predictions. As always, I am here to help you do just that.

If you have investing questions, I would be happy to speak with you. You can e-mail me at mhaertzen@wtwealthmanagement.com or call (520) 204-1058.

Sincerely,

Matt Haertzen
Matthew J. Haertzen



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