New Year is a customary time to speculate. In a digital age, when past forecasts are available online, market and media professionals find it harder to hide their blushes when their financial predictions go awry.
The ignominy that goes with making bold forecasts was highlighted in a recent newspaper article, which listed many bad calls US economists had made about 2015. These included getting the timing of the Federal Reserve’s interest rate increase wrong, incorrectly calling for a rise in long-term bond yields and assuming an end to the commodity rout1.
Australian economists were little better. A January 2015 Fairfax Media poll found the consensus view was that local official interest rates would stay on hold all year. The Reserve Bank of Australia proved that wrong a month later, before cutting rates again in May.
Their average forecast for the Australian dollar by year end was around US77c. On the last day of 2015, the currency was less than US73c. The consensus view of the terms of trade, the ratio of export to import prices, was for a fall of 3.6%. But such has been the decline in commodity prices that this measure was down 10.5% to the end of the third quarter alone.
It shouldn’t be a surprise that if economists can’t get the broad variables right, it must be tough for stock analysts to pick winners. So among the “Top Picks for 2015” published by one media outlet a year ago were such names as Woodside Petroleum, BHP Billiton, Origin Energy and Slater & Gordon, all of which suffered double-digit losses in the past year2.
It should be evident by now that setting your investment course based on someone’s stock picks or expectations for interest rates, the economy or currencies is not a viable way of building wealth in the long term. Markets have a way of confounding your expectations.
At Asset Science we guide our clients towards a better strategy: to stay broadly diversified and set an asset allocation that matches your own risk appetite, goals and circumstances.
Of course, this doesn’t stop you or anyone else having or expressing an opinion about the future. We are all free to speculate about what might happen in the economy and markets. The danger is when you base your investment strategy on an opinion.
In the meantime, if you insist on setting store by forecasts, here is a list of ten predictions you can count on coming true in 2016:
- Markets will go up some of the time and down some of the time.
- There will be unexpected news. Some of this will move prices.
- Acres of newsprint will be devoted to the likely path of interest rates.
- Acres more will speculate on China’s growth outlook.
- TV pundits will frequently and loudly debate short-term market direction.
- Some economies will strengthen. Others will weaken. These change year to year.
- Some companies will prosper. Others will falter. These change year to year.
- Parts of your portfolio will do better than other parts. We don’t know which.
- A new book will say the rules no longer work and everything has changed.
- Another new book will say nothing has really changed and the old rules still apply.
You can see from that list that if forecasts are so hard to get right, you are better off keeping them as generic as possible. Like a weather forecaster predicting wind, hail, heat and cold over a single day, your audience will prepare themselves for all climates.
The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better.
Asset Science’s more sustainable approach to that uncertainty is to focus on what you can control:
- Creating an investment plan to fit your needs and risk tolerance.
- Structuring a portfolio around dimensions of returns.
- Diversifying broadly.
- Reducing expenses and turnover.
- Minimising taxes.
In the meantime, let me wish a happy New Year to you all!
References 1. Malcolm Maiden, "The Year Market Economists Failed to See Coming," SMH, 30 Dec 2015
2. "Top Stock Picks for 2015", Motley Fool