Market Forecasts Most Likely Wrong, Not Right

December 18, 2013

For those in the financial world, the holiday season ushers in the appearance of market forecasts for the upcoming year.  On occasion, a market forecaster may actually come close to hitting the bulls-eye on where the S&P 500 ends up year-end.  That lucky guess (what these forecasts really are) may end up as a marketing tool for the forecaster to promote themselves for the next decade to future investors or subscribers.

For the most part though, forecasters end up being dead-wrong and remarkably so.  In a recent blog post by commentator and money manager, Barry Ritholz, a circulated tally of fourteen major US financial institution forecasts for 2013 revealed year-to-date results that ranged from 11% to almost 30% off-the-mark.  The average margin of error for all of these predictions was 16%.  And this is not just a one-off year either.  Financial author David Dreman made a detailed analysis of historical market and stock price forecasting in his book, Contrarian Investment Strategies”, noting that forecasts of market and stock analysts are more likely to be wrong than right.

Why all the forecasts?  Probably for the same reason people spend thousands of dollars on newsletters and “Special Investment” reports; that infallible but misguided belief that someone, somewhere has the Holy Grail system or the predictive ability to unlock investment riches for the lucky few who have the wisdom to plunk down their $39/month to gain access to supposed ‘secrets’.  P.T. Barnum was a keen observer of human nature and his quip was well-placed about the perpetual, by-the-minute, renewal of candidates to feed this gullibility mill.

So just like the din of other white noise emanating from Money-vision and other media, such precise-sounding forecasts should be ignored. In the long-run, while some strategic asset allocation may be a good idea, market forecasts usually have little or nothing to do with sound financial planning and achieving one’s long-term objectives.