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  • Futility in Market Forecasts

    I ran across this gem of an article while doing some research today.  A common article filled with predictions of what is to come in global markets:

    Why the Best Investment In 2016 Might be Global Real Estate

    When reading the article, it seems to make sense.  After all, at the time of writing this, US large stocks had been on quite and upward trajectory for years so they could not possibly continue to climb.  Rate hikes would surely kill bond investors. China’s economic uncertainties would rattle global stock markets.

    Here is the problem I have with these predictions: They are not just useless, they are toxic to an investor.  This article presents the predictions as close to facts as possible: “Market consensus now has equities flat to negative in 2016.”  “There is a cocktail of uncertainty…”.  “We are entering a period of a bond bear market…”.  

    Here are two key concepts to keep in mind:

    1. There is ALWAYS uncertainty in investing.  This is the reason you are compensated as an investor.  Without uncertainty, there is no return.  Saying there in uncertainty or expected volatility means nothing, except to scare investors into reading your article.
    2. No one, I mean, NO ONE, has knowledge of the future.  The best economists, analysts, and market prognosticators can crunch numbers all day, but none has a crystal ball.  The future is unknowable.

    This is can be severely damaging to investors if they heed the advice in these articles and adjust their portfolios accordingly.  Let us look at how this article’s predictions faired:

    1. Assertion 1: Equities will be flat to negative in 2016: 

    MSCI World Ex USA (gross div)

    3.29%

    MSCI World Ex USA Small Cap Value (gross div)

    8.42%

    Russell 2000 Index

    21.31%

    S&P 500 Index

    11.96%

    MSCI Emerging Markets Index (gross div)

    11.60%

     

    1. Assertion 2: There will be a bear market in bonds:

    Bloomberg Global Agg. Bond Index (hedged to USD)

    3.95%

    BofA/ML 1-3 Year Treasury Index

    0.89%

    Bloomberg Barclays US TIPS Index

    4.68%

     

    1. Assertion 3: Real Estate is the best investment for 2016:

    Dow Jones US REIT Index

    6.68%

    S&P Global Ex US REIT Index (gross div)

    4.00%

     

    The most successful long term investors have the ability to tune out the “noise” associated with short terms market movements and articles like this. While I may be picking on this article today, they are but one of many that do the exact same thing. Sometimes, they get it right.Most of the time, they don’t.  

    The good news is that it doesn’t matter. You do not have to be able to predict the future to be a successful investor. On the contrary, you must be disciplined.  A diversified portfolio that focus on long term drivers of returns is your best bet. 


     


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