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Market Predictions and Other Nonsense

By March 24, 2016October 4th, 2022No Comments

It’s March—and right on cue, supposed financial gurus are churning out market predictions and hot investing tips for the year ahead.

We’d like to add a tip of our own: Ignore all of it.

Taking your investing prompts from commentators and market strategists may be even less effective than consulting a storefront palm reader. The fact is that even the most respected names in the investing world have a woeful record when it comes to prognostication. Even Warren Buffet suffered his worst year since 2008.

Not long ago, Motley Fool columnist Morgan Housel analyzed 22 top Wall Street strategists’ forecasts for the Standard & Poor’s 500 index from 2000 to 2014. Their predictions, it turns out, were off by an average of nearly 15 percentage points each year1. That’s not even in the vicinity of bad – it’s downright horrible.

Market strategists and others play prophesize in order to raise their stature and attract publicity; it’s just the way Wall Street works. And, most investors want to believe them. But none of these prognosticators knows your situation or goals, and they sure won’t refund the money you lose following their advice. Investors should look at the prediction industry as a sideshow that’s hazardous to their wealth.

Successful investing consists of just a few straightforward steps, none of which make for catchy headlines. First, figure out your goals, time horizon and tolerance for market risk. Then create a broadly diversified portfolio based on your personal situation. And finally, exercise patience. By way of example, Jack Bogle, founder of Vanguard, gave some interesting retirement advice: “You’re gonna get a statement every month,” says Bogle. “Don’t open it. Never open it. Don’t peek.”2

The last step is the hardest for most people. There’s constant temptation to sell your old investments and buy new, more exciting ones. That’s especially true at the start of the year, when the chorus of year-ahead predictions kicks in.

But ignoring short-term temptation and sticking with broad diversification over the long term plan has been proven to deliver superior results. There are plenty of periods when the stock market has posted losses, of course. But as Wharton professor Jeremy Siegel has shown, the broad stock market has never lost money over any 20-year period—and that includes periods that ended in the depths of the Great Depression3.

We should make clear that as a long-term investor, you will need to periodically restore balance to your portfolio by trimming asset classes that have grown as a result of market performance, and adding to those that have shrunk. But this regular rebalancing is like maintaining a lawn: You mow it when needed, but you don’t tear your grass out and replant it every spring.

The beginning of the year is not the only time that calendar-driven advice rears its head. You may have heard of the “January effect,” where stocks that were sold for tax-loss harvesting are supposed to rebound. And a few months from now, financial pundits and media will once again trot out the old adage “sell in May and go away.” The idea is that markets tend to underperform between May and September, so pulling your money out during these supposedly fallow months will give you a leg up.

This is a tantalizing idea—until you look at the facts. While the S&P 500 was down from May to September in 2015, it rallied in each of the prior three years4. It turns out that advice can be wrong even if it rhymes.

Hare-brained investment guidance isn’t always based on the calendar. One example is the so-called “death cross.” In late August, respected financial news outlets warned that the short-term performance trend of the S&P 500 had crossed below a longer-term average. The ominous implication was that a bear market was imminent.

This turned out to be a false alarm. As Alphalytics Research points out, selling and buying back in as dictated by the death-cross strategy resulted in a loss of 2.6%. That’s no aberration. Investors following the death cross strategy since 1980 would have lost money in 14 of the 17 total instances, according to Alphalytics5.

And let’s not forget good, old-fashioned stock tips. A couple of years ago, the satirical newspaper The Onion mocked Jim Cramer’s breathless stock tips with the headline, “Everyone Who Started Watching ‘Mad Money’ in 2005 Now Billionaires.”

Numerous academic studies have shown that professional stock pickers don’t do any better than the market—and that’s before they charge fees for their services. One research paper found that from 1975 to 2006, 99.4% of professional mutual fund managers displayed no evidence of genuine stock picking skill. Similarly, the S&P/Dow Jones publishes their SPIVA report comparing stock-pickers to their indices semi-annually and Morningstar started the same in 2015.

The beauty of a diversified, long-term portfolio is that you don’t need to continually pick stocks to succeed. The broad market does the work of growing your money, and diversification mitigates your risk.

It’s human nature to seek out market predictions. They’re like unhealthy holiday-season treats we can’t seem to stop reaching for. But given the season, we suggest a resolution: While you’re swearing off junk food, swear off market predictions as well.

1Source: The Motley Fool
2Source: Money Magazine
3Source: Jeremy Siegel: “Buy and Hold? You Bet,” Kiplinger, August 2009
4Source: CNN/Money
5Source: Alphalytics Research
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