Why You Should Tune Out Financial Forecasters
This early in the new year, you see many money articles containing the word “prediction.” As Joshua M. Brown points out in his most recent book, Clash of the Financial Pundits, market forecasters love the trick of telling the future. You the investor need to remember just one trick: Beware such fortune tellers.
Making a stock market prediction that comes true often turns into a gold mine for the prognosticator. How often do you see a guest on TV who predicted the 2008 Wall Street crash or the tech bubble burst in 2000? Even if the same analyst predicted another crash every year between 2009 and 2014 and was completely wrong each time, people still listen to his latest call because he is the genius who accurately predicted the last big slump.
To cite just two examples of recently foggy crystal balls:
- At the beginning of 2014, dozens of economists predicted higher interest rates and falling bonds prices. Interest rates actually fell.
- Phasing out of the Federal Reserve’s quantitative easing stimulus program was supposed to diminish stock returns last year. Didn’t happen.
How do people who earn a living guessing the direction of the market maintain credibility even though their inaccurate predictions far outnumber the accurate ones? For starters, they write articles for big publications or websites or appear on television segments with titles such as “10 Outrageous Market Forecasts” or “Potential Surprises for 2015.”
If the guesses don’t work out, said prognosticator claims the forecasts were offered as potential investment surprises, not as true expectations. If the predictions pan out, the forecaster claims to possess perfect foresight. Predicting in this way creates a no-lose scenario, at least for the author. As Brown makes clear, the lesson is that clever market pundits couch predictions in outrageousness. The public will forgive inaccuracy masked as wackiness.
Another trick: disguising predictions as suggestions. For example, a market expert might say, “The Federal Reserve should cut interest rates X number of points.” Of course, if the Fed does cut rates, the forecaster can say he or she told investors exactly what to expect.
If interest rates aren’t reduced, the pundit can always claim the economy would be much better off if the Fed had done as suggested.
Perhaps forecasters’ most blatant ploy involves saying something could happen. I recently heard a market expert on TV predict that online review giant Yelp “could” go up 60% in 2015.
Of course Yelp (YELP) could also go down 60% this year – and if it does I bet that pundit takes no blame for pointing investors in the wrong direction. If Yelp does well this year, the forecaster’s marketing will trumpet the sage who predicted the big gain.
The best bet for your portfolio is to tune out the noise and start a patient, diversified, and measured approach to consistently investing. Watch for the fortune tellers who use the above techniques, and give them no credence.
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Lon Jefferies, CFP, MBA, is an investment advisor with the fee-only financial planning firm Net Worth Advisory Group in Sandy, Utah. You can find Lon on Twitter, LinkedIn, and Google+. Contact him at (801) 566-0740 or firstname.lastname@example.org.
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