As another calendar year gets under way, the country’s airwaves, websites, TV screens, and mailboxes are filled with prognostications about what we can expect for stocks in 2014.
Investors have to make many important decisions, among them: Should I pay attention to market forecasts and predictions? Should I act on them?
I believe the answer is simple: No.
Forecasts and predictions can be valuable — not because they are accurate, but because they show us how easy it is to be wrong. As John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”
We just finished a year in which the U.S. stock market delivered its best performance since 1997. I think you would agree that this fact is important to investors. Surely, the best minds in the business would have seen this coming a year ago.
Unfortunately, in many cases, the answer was no.
In January 2013, the consensus was that the market would be positive, though very few people predicted a runaway success. Vanguard’s best guess was a gain of 6% or 7%.
Around the same time, Mario Gabelli said stocks in 2013 would be up no more than 5%. Investors who took that forecast seriously may have missed much of the year’s actual gains of 30% to 40%, depending on the index.
A year ago, historical data based on presidential terms suggested that a gain of less than 6% would be normal for 2013, the first year of President Obama’s second term. That didn’t happen either. Historically, the second year of a presidential term has been the worst for stocks, and the third year the best.
Last week, David Weidner highlighted five of the worst predictions from a year earlier:
1. Jim Rogers, co-founder of the Quantum Fund, predicted the Federal Reserve would cripple the economy, leading to a depression. His advice was to sell stocks and buy commodities. According to Morningstar, the average long-only commodity ETF lost more than 15% last year. Managed futures funds gained about 1%.
2. Adam Parker, equity strategist at Morgan Stanley, said the best market outcome he could imagine was low single-digit gains. His advice was to hold cash and seek dividends. Cash paid almost nothing, while dividend stock funds performed well — largely due to capital appreciation, not dividends.
3. In February, hedge fund manager Doug Kass said he was “as bearish on stocks as I have been in some time.” Alternative investments fared poorly: gold funds lost more than 40%, gold itself fell 28%, currency funds gained about 0.5%, and bear funds lost an average of 34%.
4. Ray Dalio of Bridgewater Associates said the economy was running out of steam and stocks had little room to grow.
5. Swiss economist Marc Faber avoided stock-market risk to preserve gains from prior years. While taking profits can be sensible, his followers left far larger gains on the table in 2013.
Some of these may have been honest mistakes. But there is also a more troubling side to forecasting.
I recently spoke with a 62-year-old woman who invested a $1.8 million inheritance in gold companies based on a newsletter recommendation. That investment is now worth less than $400,000.
The so-called adviser turned out to be a con artist. In exchange for promoting gold stocks, he received options to buy shares at steep discounts. His newsletter created demand, allowing insiders to sell shares for quick, nearly risk-free profits.
As you might guess, I do not make market forecasts or predictions. I don’t base recommendations on what I or anyone else thinks will happen next month or next year.
All of my recommendations are grounded in long-term historical data and academic research from some of the brightest minds in finance.
In fact, my investment recommendations have not changed substantially in nearly 20 years. They are not driven by trends or predictions, but by evidence.
I can’t tell you what will happen this year.
But if you want to know how I believe investors should be positioned right now, I’ve made my recommendations for Vanguard funds and commission-free ETFs easy to find.
And if you’d like to hear my thoughts on 2013 and 2014, I invite you to listen to my podcast.
Richard Buck contributed to this article.