In January you can count on two things, football gets serious (except for the Gators in The Sugar Bowl) and stock market predictions sprout. The Walton Sun follows neither NCAA major college football nor the NFL but let me shatter a dangerous myth.
Trying to predict market returns is useless. You could probably say the same about football forecasting. Last summer no one predicted Colin Kaepernick would have more yards rushing in a single game than Tim Tebow in 16.
Newsflash, Market timing forecasters are less accurate than coin-flippers. The CMO Advisory Group tracked popular industry forecasters since 1998 and found they accurately forecast 48 percent of the time. In fact, CMO decided to kibosh this project in 2013 stating, “The accuracy rate has been very stable for years” and they “strongly doubt continuing to collect forecasts would materially affect findings.”
Trying to predict the future is human nature. We have genetic hardwiring to associate most recent past events with the future. We evolved that way; with investments, however, it’s dangerous.
Take early 2009, people rushed to exit the market as the economy sputtered to the sharpest quarterly decline (Q4, 2008) since the Great Depression. Unfortunately, they missed four great market years. From January 2009 through December 2012, the Russell 1000 (largest 1,000 U.S. publicly traded companies) returned 15 percent annualized.
In 2012, many advisors recommended avoiding European stocks because blah, blah, blah. Unfortunately, European stocks outperformed US stocks in 2012. ProShares UltraShort MSCI Europe (EPV), an exchange traded fund designed to move inversely to European stock prices, had a net inflow of over 2000 percent from 2010 through 2012.
Investors got creamed last year with EPV losing over 35 percent. While money flowed in, investors took a bath; EPV had a three-year negative 28.5 percent return. Adding insult to injury, European stocks sport higher dividend yields than American counterparts.
Income investors, by shunning Europe, got a triple shot of bad news/luck/advice. It you like setting your money on fire, be my guest. It never ends. Remember Meredith Whitney’s famous municipal bond call on Sixty Minutes. Instead of collapsing, municipal bonds, generally speaking, soared in value.
My friend and Marine aviator Rick Ferri recently said it best, “Forecasting isn’t about predicting the market; it’s about marketing the prediction.” Mad Money’s Jim Cramer worked his 46 percent accuracy into a lucrative CNBC gig. Another forecasting corollary involves a financial alchemy known as tactical asset allocation.
Wizards posing as investment advisors recommend overweighting particular sectors. While it sounds great, it doesn’t work, see Europe in 2012, Meredith Whitney, et al. Tactical asset allocation linked with market forecasting is an example of financial pornography. The combination only titillates, provides no redeeming social value and is hazardous to your wealth.
Investments and your asset allocation should match your time horizon, your goals and risk tolerance. It’s really simple but hard to execute; even I get a little help from my friends. Early in the morning I dabble as a gardener (so did George Harrison).
Market timing/tactical asset allocation makes as much sense as pulling up all my perfectly good arugula or bell pepper and moving them to another spot. To everything, there is a season and a time to every purpose.
Buz Livingston, CFP, is a fee-only certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.