Article Spotlight

 

In this series we analyze current financial articles and explain how the conclusions of the article relate to our investment strategy.

A Loser’s Game: Market Speculation and Forecasting

On Wall Street, it is a long-running tradition to make economic and financial forecasts for the upcoming year.  Bankers, investment analysts, fund managers, and economists are among those who make their living in part by trying to predict the future of financial markets.  This article examines some of the calls made in 2012 and remarks on the accuracy of these professionals and institutions.

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Below are a few examples of these predictions along with what actually occurred:

Prediction 1

  • Morgan Stanley forecasted the S&P 500 would lose 7%.
  • Reality: The S&P 500 rose 16% with dividends reinvested.

Prediction 2

  • John Paulson, who manages $19 billion in hedge funds, said that the Euro would fall apart.
  • Reality: The Euro is still intact, and the MSCI Europe index increased 19.12% in 2012.

Prediction 3

  • Goldman Sachs predicted that the CSI 300, an index of Chinese equities, would rise 36%.
  • Reality: The CSI 300 index rose 7.6%, a far cry from 36%.

Many forecasters argue that political actions like quantitative easing are difficult to predict.  They say the central bank pumping money into the economy this past year had a larger impact than predicted.  The problem with this logic is that markets are inherently unpredictable, and there will always be unforeseen events.   Extensive research has shown forecasts from year to year are usually wrong, but this does not stop financial professionals from continuing to make predictions.

Investors are better off seeing forecasts as entertainment – not as a basis on which to make investment decisions.  It is crucial to consider your investment allocation in terms of your time horizon and risk tolerance.

The next time you hear a market prediction and consider changing your portfolio, take a moment to ask yourself: “In the past, have market forecasts been correct?”  As this article shows, the answer is generally no.  Once you accept this, revisit your long-term goals, and if they match your portfolio allocation, you can stop worrying about your inaction.  Sometimes the best action is taking no action at all.

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About Jeannie Pedersen

Jeannie is a financial advisor working with clients in the Portland area and throughout the Northwest. She has worked with individual investors since 1998. Jeannie graduated from the University of San Francisco with a Bachelor of Arts degree in Financial Economics and a minor in Business.

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