Every January financial writers, regardless of the media, make predictions for the future. Some do it because it’s how they get paid. Others, I suppose, do it for marketing purposes. In a way, they are filling a need. People look for patterns to guide them; it is a part of the evolutionary process.
Scientists have found human beings are hard-wired to look for signs to steer us in the right direction. We are the descendants of the ones who figured out what worked. How much we’ve learned could be subject to debate.
Our intuitive instincts, though, can lead us astray. Jonathan Clement wrote that if you start with the assumption you have no clue what will happen next in the financial markets, the rest is obvious. No one knows; there are too many variables. Market predictions are especially troublesome. Their track record makes astrologers look good. Considering past performance, financial prognostications should be in the fiction category. If you want creative writing, read a fantastic novel like “Where the Crawdads Sing.” Avoid like the plague the audiobook version. The reader mangled the book’s southern dialect.
Paul Hickey, a co-founder of Bespoke Investment Group, compared predictions for the last two decades. He found the median forecast for the S&P 500 was almost 10 percent contrasted with a 5 1/2 percent actual return. Historically the U.S. stock market goes up twice as often as it drops. The problem is we don’t know when either will occur.
Like a coin that has the likelihood of coming up heads more than tails, writers often forecast higher markets but the gap between their forecasts and actual returns is enormous. In 2008, when the S&P 500 lost almost 40 percent, the median estimate was a rosy 11.1 percent. When an accurate forecast would have made a difference, the projection was substantially off.
Instead of worrying about which way or how much the market will go up or down, imagine a terrible downturn is about to occur, then decide how you would handle it. In my lifetime, the worst stock market decline was from October 2007 through February 2009, when worldwide markets lost 55 percent. Over that period, a conservative portfolio, 25 percent stock/75 percent bond, lost 13.5 percent but recovered all the ground before
Santa Claus came the following December. A more aggressive portfolio, 60 percent in stocks, lost 35 percent, and took over two years to recover. Using low-cost index funds diversified appropriately for your risk tolerance, goals, and time horizon is a better strategy than trying to divine which way markets may go. Even the gurus can’t get it right.
When you attempt to time the market, you have to be right twice — when to get out and when to get back in. Plus, you have to keep doing it.
You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.