The financials industry spends a lot of time and money on preparing stock and bond market forecasts – especially at this time of year -- but are they “helpful” or “useless” when it comes to making investment decisions? In my opinion, most of these forecasts have little predictive power. In other words, they’re useless in terms of providing investment advice although they can be very useful (see below) for their analyses of past trends.
As a former stock analyst and fund manager, I wrote some of these very same forecasting reports in the 1980s and 1990s. Forecasting the future (and having a story to tell investors) is fundamental to the industry. While market forecasts help explain the past to investors, they have a terrible track record when it comes to predicting future trends. This “hit or miss” record of stock and bond market forecasters is clearly laid out in a Nov 23, 2017 article “Wall Street’s 2017 Market Predictions: Pathetically Wrong” by James Mackintosh of The Wall Street Journal. Mackintosh points out that even when a forecast is right (e.g. predicting the stock market going higher in 2017), experts were too cautious about the strength of the increase, expected the US dollar to strengthen (not weaken) and expected inflation to take off (and depress bond prices). Some forecasts by market gurus were completely wrong (as they often are every year). Jeffrey Gundlach, a billionaire bond guru and DoubleLine Capital founder called for a significant stock market correction in August 2017, saying he was bearish and was loaded up on put options. However, there was no market correction and Q3 proved to be a very strong quarter for stocks. There are many more examples of forecasts that were wrong than right, but investors and financial professionals appear to have a short memory.
What to do? If stock and bond market predictions have such a “dire track record,” what is helpful to investors? To me, the answer is: have a model portfolio created for you that best suits your financial needs into the future (and is consistent with your risk tolerance), rebalance it periodically and revise it as your income and growth needs change. This model portfolio should be imbedded into your financial plan to give you the highest probability of not outliving your assets. This is not rocket science, but it does require engaging a financial planner to work individually on your situation -- an approach that much of the financials industry has avoided to date (although this is changing).
In sum, stock and bond market forecasts (are hit or miss, despite the best and most thorough research and analysis Wall Street can provide. Listening to forecasts and following them is like trying to drink from a fire hose. Who’s right and who’s wrong? Who knows? The Wall Street market forecasting approach means you “buy low and sell high” by identifying “inexpensive assets” before the market “discovers them.” It then assumes you subsequently outperform the market when these holdings go higher (or you sell something before it’s predicted to underperform). By comparison, the Financial Planning/Model Portfolio forecasting approach means you engage a financial planner to “select the best portfolio model for you,” you become invested across a broad in a broad range of assets and your portfolio periodically is rebalanced (by selling outperformers, buying laggard assets) over time.