The problem with listening to year-end and year-ahead financial forecasts is that someone will be right, most will be wrong and all will be forgotten by everyone but you long before the year is out.
It’s not that making predictions is a fool’s game – it’s fun, and it distills an expert’s thinking down to something easy to digest. It’s that acting based on those forecasts is foolish.
That has never been more clear to me than this month, when my show MoneyLife has had a run of tremendous guests, all of them talking about the year ahead and none of them in real agreement over what happens next. (You can find my show at moneylifeshow.com.)
Grace, a 40-something listener from Tacoma, who has been taking greater charge of her finances since going through a divorce two years ago, wrote that each guest has been smart and sounded great, but that the abundance of advice had left her confused about what to do next.
“If I only listened to one show, I could have come out thinking, ‘Yup, that’s a good expectation for what’s going to happen and how I should act,’” she wrote, “but since I listen every day, it all sounds good but I can’t decide who to believe is right.”
It started with Jim O’Shaughnessy of O’Shaughnessy Asset Management – author of “What Works on Wall Street” – suggesting that anyone who needs yield and income will want to look at global high-dividend stocks, because they won’t find that income in 10-year Treasuries and domestic dividend plays have been bid up.
Next, it was David Lafferty, chief investment strategist at Natixis Global Asset Management, suggesting that volatility would be up for the first quarter of 2014 – and possibly the first half – but noting that investors with reasonable expectations should ride it out to reasonable single-digit gains for the year.
John Herrmann, the rates strategist for Mistubishi UFJ Securities was far more bullish about the economy than most, suggesting that the broad economic numbers have been misleading and the nation’s underpinnings are much stronger than most people believe, while Peter Schiff, chief global strategist for Euro Pacific Capital, is one of the loudest bears around, and he was growling about how investors need to overhaul their investment strategy or risk getting mauled by what lies ahead.
You get the picture. That’s just listening to one long interview per day and trying to sum it up in a line.
It’s no wonder someone like Grace – who is trying to prepare for the year ahead – is flummoxed. One day she’d be getting more defensive, the next more aggressive, the next out of the market entirely, and shortly thereafter she’d be back in whole hog, but completely out of bonds.
It doesn’t invalidate what any of the experts said. It’s just a reminder that their job involves making forecasts – and my job involves airing those views – but an investor’s job is not about forecasting at all.
Instead, to the average investor, the point of all of these forecasts is to frame expectations.
Taking in so many predictions and look-aheads makes investors consider multiple points of view, a worthwhile effort precisely because it is so easy for experts to sound “smart” but so difficult for them to actually be “right.”
In the early 1990s, The Economist told a joke about Albert Einstein arriving at heaven’s gates and meeting three men, asking each about their IQ. The first man claims a 190, and Einstein says “Wonderful, we can discuss my theory of relativity.” The second answers 150, and Einstein says, “I look forward to discussing the prospects for world peace.”
When the third man says he has an IQ of 50, Einstein says “So what is your forecast for GDP growth next year?”
Only a moron would act on forecasts.
The smart thing to do is to use them to frame expectations, to come up with the broad assumptions that you can believe in, that allow you to frame an asset allocation around so that you are acting — or not acting — in a manner that you will be able to live with no matter what happens next, rather than using every market hiccup as a reason to change directions.Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.