22 Jan New year predictionsRead Time: 4 minutes
Image by Virgil Cayasa on Unsplash
“You do not have to say anything but anything you do say will be taken down and may be given in evidence”
UK police caution prior to the Criminal Justice and Public Order Act 1994
Apart from being the season to start hoovering up subscriptions from suddenly enthusiastic dieters and gym members, the new year is traditionally the time for everyone to offer their predictions for the year ahead. Decades ago, it was easy for such pundits to draw a veil over the inaccuracies of their previous forecasts but one of the benefits of the digital age is that, for good or ill, those earlier predictions are still available to be used as a stick to beat them.
Among the most popular predictors are economists and investment managers, on whom journalists can always rely for a few column inches of an article. Such forecasts typically cover the economy, interest rates, currency movements, the market, individual sectors and sometimes specific stocks.
Some of these forecasts, as one might expect, are correct. Equally, others are wrong, sometimes wildly so. Does his mean that they are unworthy of their status? Not really. Economies are highly complex and even something as apparently simple as gross domestic product (GDP), which apparently measures the output of an economy, are not necessarily a good guide to the productivity of an economy. GDP only includes activities where money changes hands, so booking flights direct online rather than via a travel agent or caring for a relative contributes nothing even though it might be more efficient. Some countries’ GDP even includes criminal activity (cocaine and prostitution are two such examples). Given how many variables are involved and the fact that they can influence each other, using a model to forecast something as complex as an economy is inevitably going to involve a lot of assumptions and guesswork.
Still, it seems that there is a steady queue of people willing to commit their forecasts to scrutiny. The Sunday Times recently reported that of advice and platform giant Hargreaves Lansdown’s ‘best buy’ list of 61 funds – which is curiously called the ‘Wealth 50’ – in January 2019, only 28 (46%) have outperformed their sectors in the last year. Hargreaves is not short of resources to study such funds, so this is less likely to be attributable to poor research than to the fact that it is just really hard to do accurately.
It should therefore be clear that reliance on the predictions (guesses) of anyone is unlikely to be a sound way to construct an investment strategy, particularly when those predictions cover such a short period as a year. This lack of a reliable crystal ball allows markets to confound such forecasts with impunity. Having a portfolio strategy which is based on your own goals and attitudes and always remaining diversified is the more boring, but for most people better, option.
There is nothing wrong with making predictions about the future – it is, in isolation, harmless and speculation can be fun. In fact, predictions are not even bad when considering investing. All market participants continually make predictions about the future as they make their decisions on how to deploy their capital. The aggregate of all these predictions determines market prices, so investors’ outcomes are already driven by them and by how they adjust when new information is available. In public markets though, prices are not driven by one person’s opinion.
At one conference I attended, a fund manager whose name is fortunately (for him anyway) lost to my failing memory spent 15 minutes telling the audience that, over the next 12 months, the market was either going to go up, down or sideways. While he was undeniably correct, being willing to stand up and offer such insights clearly demonstrated why he rather than I was the one delivering the presentation. I just could not have strung it out for that long. Apparent the qualifications for being on that panel were more about presentation skills than expertise in the subject matter.
After all that, if you still insist on relying on forecasts, here are a few that I predict will happen in 2020:
- Much of the space in newspapers will be devoted to forecasting the future.
- More of that space will cover politics.
- Pundits and market commentators on TV and radio will fill air time discussing what the market is doing in the short term and why.
- Markets will rise sometimes and fall at other times. Or they may stay flat.
- Some economies will improve. Others will decline. Their fortunes may be different from last year.
- Some companies will do well. Others will fail. Their fortunes may be different from last year.
- Some of the assets in your portfolio will do better than others but nobody knows right now which they will be. And they could all go up or all go down.
- Someone will publish an article or book which claims that “this time it’s different”’
- Someone else will publish an article or book which claims that it isn’t.
- In around 12 months, there will be a rash of articles offering forecasts for 2021.
I remember one economist once saying that the secret of economic forecasting is to ‘give them a number or a date, not both’. Your scribe’s forecasts deliberately avoid both as, like the weather forecaster advising carrying both sunglasses and an umbrella, we find that it’s safest to be ready for anything.
You can’t control any of the ‘stuff’ that happens in the economy or the market. Sometimes those events will be better than you expect; other times worse. The best approach is to focus on what you can control and ignore the rest. Then just check every now and again that you are still on track to meet your own goals.