“You are entitled to your opinion. But you are not entitled to your own facts.” Senator Daniel Patrick Moynihan
It’s easy to express an opinion about the future. We all do it all of the time. But our opinions (and even so-called expert opinions) about the future rarely work out well.
What we don’t want to do is to actually use opinions about the future to drive our investment strategies. Investing based on your (or someone else’s) stock picks, interest rate forecasts, economic growth or currency predictions, or basically any other financial indicator for which we want to be a fortune teller, isn’t a way to build wealth. Markets, the economy, interest rates, currencies, etc. just don’t behave according to our forecasts. In fact, we’re usually way off.
Jim Parker, with Dimensional Fund Advisors, publishes annually some sad, but true, data points about how ineffective forecasts can be to use for actually making investment decisions. Here’s an excerpt from his January 12, 2016 blog: “…22 strategists, polled by the Wall Street Journal, estimated an average increase for the S&P 500 of 8.2% for 2015. The most optimistic forecast was for a rise of 14%. The least optimistic was 2%. No one picked a fall. As it turned out, the benchmark ended marginally lower for the year.” Economists struggle to use broad variables to predict accurately what the future may hold.
What do smarter investors do when it comes to their view of the future? We invest in diversified portfolios, and establish an investment policy and target asset allocation that is matched (using data like we use from Riskalyze analysis or other unbiased tools) to risk profiles, goals and objectives. Predictions that drive investment strategies turn into speculation. Speculation is not investing. It’s really a form of gambling.
10 Predictions for 2016
If you must predict, we thought we’d reprint these ten predictions from Dimensional’s Jim Parker for 2016 that will actually come true:
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.
Given the fact we’ve started off the year with the worst start ever, we will share a few comments and predictions we’ve actually been hearing over the last few days:
The market tanked – I should have predicted it.
My system for picking winners is proven.
The market hasn’t bottomed.
The market has bottomed.
The market won’t recover – we are doomed.
The market will recover quickly – this is easy money!
Who is right and who is wrong? Probably nobody. It’s tougher for people to admit that the reality of investing is that none of us really know what’s going to happen, particularly over short run periods of time – especially when it comes to our retirement assets.