As an investment professional, one of my biggest pet peeves are guesses (our industry calls them “forecasts”) that everyone is compelled to publish each year. Last week, I saw the first post soliciting investment advisors’ “forecasts” for next year. These forecasts perpetuate some of the worst tendencies of our industry.
Most investors are looking to fund long-term multi-year goals such as retirement or college funding. A one-year time horizon doesn’t align with their investment time horizon, so it is irrelevant to the decisions that they make regarding their portfolio. If their time horizon is only a year, they probably shouldn’t be invested in the market. Focusing on a one-year time horizon reinforces an emphasis on short-term thinking that only serves to harm investors. Wealth is accumulated, but the compounding of returns (more good than bad) over many years rather than the performance of the market in any one year.
When many investors see these annual forecasts, they think they to should be looking at their portfolio and how it will perform in the next year. This belief creates an urge to “do something” that is common among investors. It is a belief that the more active and engaged I am the better the returns that I will have. Unfortunately, this is wrong. Investors who are disciplined and make infrequent changes are likely to do better over the long-term.
Besides short-term thinking, these forecasts also keep alive the mistaken belief that “smart” people can routinely predict what the market is going to do in the short term. The request for 2020 forecasts had me thinking back to this time last year when everyone was preparing for their 2019 forecast. The 4th quarter of 2018 was tough for stock investors with the S&P 500 Index declining 13.52% and the MSCI EAFE declining 12.50%. With those losses top of mind, I don’t recall a lot of market forecasts that called for the S&P 500 Index to gain 23.16% or the MSCI EAFE to gain 15.30% through October 31 of this year.
So, as we head toward the end of the year, I encourage you to skip the market forecasts. They shouldn’t impact your investment strategy and likely aren’t going to be predictive of what the New Year will actually hold.
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