Why Do We Still Listen to Forecasts?
Key Takeaways
Predicting the movement of markets over the shorter term is an exercise in futility.
Even the experts with their army of analysts and treasure trove of data rarely get it right. The average difference between their forecast and what the market actually did was 14.7% per year!
So why do it? For many investors, getting it right could mean a windfall and a false sense of certainty to something which is highly unknowable. However, a better option would be to allow an investment plan to guide your long-term decisions which eliminates the need for predictions.
Forecasts create the mirage that the future is knowable.
— Peter Bernstein
If you had been following what has been happening to the market in 2023, you would have known that stocks have risen far more than expected and has defied the fear brought about by recession risks, rate hikes, high inflation and the Ukraine war (does anyone even talk about it these days?).
As a result, investment forecasters and strategists who have been advising clients to take less risk in anticipation of further downside have been left hanging and are scrambling to revise their predictions and expectations.
'We Were Wrong': Morgan Stanley's Wilson Offers Stocks Mea Culpa.
US Recession Becomes Closer Call as Economists Rethink Forecasts.
If you were sitting on the sidelines or were late to jump back in, you may be feeling a little left out. However, listening to and believing in forecasts is not a new thing. After all the experts should know something more than you, right?
In his book “Extraordinary Popular Delusions and the Madness of Crowds” first published in 1841, Scottish author Charles Mackay detailed how prophecies and fortune telling had driven the decisions of humans for years. One story was particularly interesting.
In 1524, the fortune tellers and astrologers in London held sway over the population and they predicted that on 1st Feb, the level of the Thames river would rise to a great height, wash away thousands of homes and flood the entire city. Upon hearing this, thousands of residents evacuated to 20 to 30 kilometers away. The superior of the monastery was so worried that he built a fortress on a hill and stocked it with boats and 2-months worth of provisions. Well, the fated day arrived and the river was normal with no flooding to be seen. Upon query, the fortune tellers apologised. They highlighted that they were not wrong, but had envisioned the wrong date. The calamitous occasion was supposed to happen on 1 Feb 1624 instead, a whole century later. So London was safe for the next 100 years.
As we have written before - predicting the movement of markets over the shorter term is an exercise in futility. At the start of every year, chief market strategists at major financial institutions make their forecasts for the year. This ranges from where the economy will go, what central banks will do, how currencies will move, to what asset classes are expected to outperform. The forecasts with the longest track record are from the strategists who estimate the annual performance of the S&P 500 (proxy for the US stock market). Their record is quite dismal — the average difference between their forecast and what the market actually did was 14.7% per year!
At the time of writing, the S&P 500 index was at 4,566 - above many of the estimates issued by the banks at the beginning of the year. This has led to a flurry of upward revisions, lest these investment experts be called out for being “too wrong”.
The next chart shows how much some of those initial forecasts have been revised. Even with these changes, can anyone predict how the market would end up on 31 Dec 2023?
Despite this happening year in and year out, investors still hang on to such forecasts as they believe that it would give them a leg up over everyone else. Sometimes it’s not just simply ignorance or hope when acting on these predictions.
Many people listen to the forecasts because to them, it could be a make or break event. Getting it right could mean a windfall which could bring them closer to their goal. The other reason is that investing and understanding how markets work is confusing and uncertain. Forecasts, like the Bernstein quote at the beginning of the article, help to provide some form of certainty to something which is highly unknowable.
Whilst you shouldn’t stake your whole fortune or the money you have so diligently saved up over time on forecasts and predictions — it sometimes feels good to bet a small amount on it. It could provide some entertainment and who knows, maybe it turns out to be a right call. However, the bulk of your wealth should be placed in a boring, diversified allocation and you should have an overriding investment plan which guides all your long-term decisions.
By doing so, then you don’t need to radically shift homes like the Londoners did in the 1500s and you don’t need to keep jumping from one investment to another.
If you want to find out how an investment plan can help you invest better and help you reach your goals, come and chat with us.
