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Are Market Predictions Worthless?


A question I frequently get is – “What is the market going to do next year?”  People get annoyed when I answer that I do not know, but odds are it will move up.  They want specific answers.  When I tell them most predictions are wrong halfway through the year, they are shocked.  But because people want these predictions and market analysts like to make predictions, we see lots of guesses this time of year for what the market will do in the following year.  So, are market predictions worthless? Well, let’s look at the data.

 

I’m pulling this data from a good article that was on MSN recently. You can click here if you want to see it. It’s best I share it in bullet format, so here goes.

 

  • Predicting if the market will go up or down increases the odds of success for these “experts.” The market has risen 70% of the time.  So, odds are better if you keep the prediction a bit more general.

 

  • But, up or down is too general for most people.  They want a specific number. Here is where the experts get into trouble.

 

  • Since 2000, the median forecast for the S&P500 has been an annual increase of 9.8%.   Man, I’d love to average 9.8% a year for the last 20 years!

 

  • The actual average return has been 5.5%.  That is quite a difference. Specifically, it is a decrease of 4.3 percentage points.   Or, 45% lower than what the “experts” have predicted.

 

  • The worst year was 2008.  We all may want to forget about what happened in 2008, but probably no one wants to forget more than the experts.  The median prediction for the S&P500 was just over 11%.  The actual return that year was nearly a negative 40%.  To quote Major League – “Just a bit outside.”  The “experts” were off by nearly 50 percentage points!   DANG!!!

 

I’ve said for years, forget trying to predict what the market will do on a day-by-day or even yearly basis.  You have no control over what the market does.  I hate to break it to you.  However, you have control over some of the most critical components to what makes for successful long-term investing.  They include:

 

  • The fees you pay.

 

  • How much you pay in taxes (to an extent).

 

  • Your asset allocation.

 

  • Your savings rate.

 

  • Finally, your emotions.

 

So, while these “experts” cannot help themselves by making a prediction when a microphone is shoved in front of their face, remember their track records.  Instead, focus on things in your control as this is where you will find success.