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Why Investors Should Ignore Predictions

Forecasts are aimed at the mass market and rarely help individual investors.

HUMANS LIKE CERTAINTY. That’s why there are polls about upcoming elections. It’s why people check the weather report. It’s why investors have a voracious appetite for market predictions.

Wouldn’t it be great to know what markets will do tomorrow, next month or next year? Then you would know exactly where to invest and your account would do nothing but print money.

Of course that’s ridiculous, no matter how blissful that scenario may sound.

If everyone had a crystal ball that forecast the correct way to invest, there would be no market risk. The playing field would be equal and the benefits of investing would completely disappear.

Humans continue to crave some glimpse of certainty into the future performance of their investments.

However, the pundits and market analysts don’t typically reach a consensus when it comes to their forecasts.

True or False

Here are some market predictions from media outlets that came within the same 24 hours:

  • There is a high probability that the S&P 500 index will rise 10%.
  • If not for trade wars, the S&P 500 would currently be almost 5% higher.
  • Markets continue to hit resistance.
  • Markets are likely to hit new highs in 2020.
  • Which ones do you believe?

In most cases, people latch onto the prediction that aligns most closely with their existing beliefs. This is a form of confirmation bias, or the penchant for viewing new information through the lens of existing opinions or ideas.

If you think markets are overbought, or that the economy is peaking, you probably side with the more bearish forecasts. But if you believe there is plenty more upside potential, the bulls’ forecasts will resonate with you.

If you view these forecasts as simply information or even entertainment, that’s fine. It means you are probably not tempted to shuffle around your portfolio holdings based on these opinions.

Investors run into trouble when they use predictions and forecasts as a way of allocating securities.

Some of these forecasts seem quite logical, with a basis in current or past economic or market data. Even in those cases, investors are making emotional decisions when they trade based on forecasts. Unfortunately, they can often justify these rash moves, by basing the trade on some economic report.

If We Could See Into The Future

If all economic reports were accurate predictors of future market moves, that would be another way that every investor would have a clear signal of what to do, and all risk would be removed. Without taking that risk, investors would not be rewarded and there would be no point in investing at all.

Every year, Americans spend a small fortune on newsletters and trading software with the hope of getting a leg up on the poor fools who are simply gambling or those investing in stocks using a buy-and-hold strategy. Sadly, these products are aimed at the mass market and are no substitute for individualized planning. If you don’t have absolute clarity on how much income your portfolio needs to generate to cover your living expenses, how can you decide which securities to own, in what quantities, and when to buy and sell?

Some kinds of market information and data are helpful to the individual, but the type that urges buying and selling based on news events should be ignored. So should predictions of how markets or individual securities will behave over any specified period of time.

Your Financial Future

According to data compiled by Dimensional Fund Advisors, $1 invested in the S&P 500 in January 1970 grew to $422.75 by December 2018. There were plenty of dips and significant declines along the way, accompanied by panic-stricken pundits and gurus urging an immediate sale of assets.

Investors who suffered the most during the 2007 through 2009 meltdown were those who capitulated and sold at lows. The guru predictions at the time grew ever more dire.

While there are certainly predictions for further upside trade in 2019 and 2020, the debacle of 12 years ago left most with a prevailing feeling of fear, rather than hope or greed.

Market predictions convey a false sense of safety. Somebody, supposedly in the know and with data and expertise to back up his or her opinion, issues a proclamation of where stocks or bonds will go. Investors follow this advice, often to their detriment. Sure, any given forecast may turn out to be correct, but if you sell out, when do you enter the market again? Do the forecasters tell you how much of any security to buy or sell? Do they give you predictions on foreign markets or small stocks, or just the usual large-cap domestic equities?

Do yourself a favor and stick to a long-term plan tailored just for you, rather than changing course based on crystal-ball predictions.

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