HISTORY BEST WAY TO PREDICT MARKETS FUTURE
1/16/16
Uncertainty is the inability to forecast future events. Of course there are plenty of pundits out there willing to try to tell the future. Once in a while people get lucky. Yet history is littered with people who made bold predictions about the future and turned out to be spectacularly wrong. The trick is to sound like you know what you are talking about.
Investors have no shortage of places to get opinions when it comes to the future of the stock market, interest rates or the economy. There are at least two cable channels, countless publications, websites, blogs and apps where you can get predictions. The problem is that there is too much information. Who do you listen to?
It seems investors will take advice from anyone who seems to know what they are talking about. Part of the problem is that the average investor doesn’t know enough about finance to determine whether someone is legitimately giving advice or trying to sell them something. For example, if you watch the cable financial channels they have advisors come on and give their opinions about this and that but basically it’s a commercial for their company. All they have to do is sound like they know what they are talking about. They always have their company name prominently displayed behind them but they don’t know any more about the future than a fortune teller. After they appear on XXXX cable channel they can promote the fact and it seems to impress people.
Many of the so called experts that make these predictions work for brokerage firms as stock analysts or market experts. They get paid a lot of money to give their opinions. Part of their job is to create an aura of creditability so that investors will trust their firm. But their main purpose is to give out investment ideas so that their brokers can sell them. In the brokerage world activity create profits so the more great sounding ideas they can generate and get out to the public the more business their firms may get.
Warren Buffett said in his 1992 Berkshire Hathaway Chairman’s Letter said, “We have long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
Anytime someone is offering you unsolicited advice about the future, don’t listen. Look at their motive. If they are predicting a financial meltdown and offering to sell you some gold it’s really not a very credible prediction. Yet judging by the number of gold commercials out there they must be making lots of money from investors willing to swallow their scary predictions.
That may be an extreme example, but the typical investor has a bunch of investments they collected over the years. Each one of the investments was purchased because some one made a prediction that sounded good at the time without considering the source. Many times these predictions come at times when an investment is hot. There is lots of press about it, lots of talk about it among investors, and it’s easy to get people to buy it. So what should you be doing?
Don’t listen to any of these experts. No one knows what will happen in the short run. But we do know what has happened in the past. According to Morningstar, in the last 90 years a balanced portfolio of 60% stocks, 30% bonds and 10% cash has returned about 9% per year. What you should be doing is determining what your goals are and if you are investing for long term goals you should be taking a long term view instead of focusing on days, weeks, months or even a few years.
Investors get so confused by all of the noise created by the media and the self appointed soothsayers that they are missing the big picture. Sure everyone knows the financial markets don’t go straight up 9% every year but they panic when it goes down at all. 10 to 20% declines in the stock market happen frequently yet people panic like the world is ending. Once in a while the stock market goes down more than that. From the fall of 2007 to the spring of 2009 the Dow jones Industrial Average dropped 50%. Oh how soon they forget. On Black Monday October 19th 1987 the Dow dropped 22% in one day. It happens.
Since we do know the markets record in the past we can say that short of Armageddon or the takeover of the US by ISIS, markets will go up over time. Once you accept that, you will be able to ignore the fortunetellers and maybe even take advantage of other investors that do listen to the tarot cards.
William Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is a Registered Investment Advisor based in Kearney NE