Predict Nothing

August 2, 2011 - Al
I used to think I could predict the outcome of football games. Then my dad made a bet with me: that my mom, who knew absolutely nothing about football, could beat me over the remainder of the season. My mom made her predictions based on which city she liked more. You can guess the outcome.
 
There is never a shortage of those making predictions. Wouldn’t it be nice to know how those predictions turned out?
 
Mark Hulbert tracks investment newsletters. Here’s a sampling of what he has found, as told in this Money Magazine article:
 
“if you had invested $10,000 in a portfolio in 1980 following the advice of the top-performing letter over the prior year, and then changed it each year to the top newsletter for the prior year, your investment would be worth just a few pennies….”
 
“If you had taken your investment advice from the newsletters with the best ten-year track records, you still would have underperformed the broad stock market indexes in the years that followed.”
 
How about politics and economics? A recent Wall Street Journal article highlighted a project that tracked over two decades the predictions of 284 people who make their living “commenting or offering advice on political and economic trends.” 82,361 predictions were tracked. The results?
 
“…the vast majority performed worse than random chance. In other words, they would have done better picking their answers blindly out of a hat.”
 
This columnist nicely sums it up in a Street.com article:
 
“Whenever you find yourself reading (or watching) someone who tells you where a stock or the markets are going, consider these factors:

- No one truly knows what tomorrow will bring. Nobody. Any and all forecasts are, at best, educated guesses.

- All prognostications are instantly stale, subject to further revision. Conditions change, new data are released, events unfold. Yesterday's prediction can be undone by tomorrow's press release.”

There were certainly those who foresaw the bursting of the tech bubble in 2000 and the recent housing bubble. The challenge for those of us evaluating predictions is that it’s easy to say “well, obviously” when you’re looking in the rear-view mirror.
 
So what to do? Remember that what goes up is likely at some point to go down. Diversify your investments, aiming for an overall level of risk that has the greatest odds of meeting your financial goals and objectives and that you can stick with through the ups and downs of the markets. And remember that being suspicious of opinions and the crowds can be half the battle.

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