Stop Paying Attention to Forecasts & Predictions

Posted by John Charles Kernodle on February 01, 2014  /   Posted in Newsletter

Every year, the airwaves are filled with experts predicting where the financial markets are headed. They tell us where the market’s spots will be, and where to avoid investing your money. They whisper about the top stocks to own, and the investment plays that are the best bets to beat the market.

It’s no secret that many investors take these predictions as gospel, shifting their investments to follow the smart money. Unfortunately, these investors more often than not are disappointed in their performance. After all, the truth is that nobody knows where the markets are heading in a given week, let alone over the course of a year.

Want proof? Just look at last year. Experts generally expected the stock market to gain 5% or 6% in 2013. Even PIMCO’s Bill Gross, one of the most respected investors on Wall Street, forecasted mid-single-digit growth for the stock market last year. These experts said issues such as high unemployment and a soft economy would create headwinds for the stock market. So what happened? The S&P 500 index rocketed up nearly 30% in 2013—its best annual performance in 15 years.

The lesson here is to stop paying attention to the forecasts and predictions from these experts. Yes, some may hit the bullseye—and make a mint for those who took their advice. But year after year, these experts are wrong much more often than they’re right. The data bears that out: The following chart shows the percentage of equity funds that got beat by their benchmarks over the five years through mid-2013. In each case, more than seven out of 10 funds in each category underperformed its benchmark index. And, remember, these are funds that are managed by Wall Street pros with teams of analysts and lots of resources for investment research.

It’s human nature for us to trust the experts. We want to take on faith that what they’re saying is true. And since their overwhelming focus is on beating the market, that’s what we focus on, too. But history says that individuals trying to beat the market are more likely to underperform: The average investor gained just 4.25% a year during the last 20 years while the S&P 500 index returned 8.21% each year.1 One reason: Investors tend to buy at market peaks and sell when prices are low.

The fact is, you don’t need forecasting, predictions or prognostications. You don’t need to overhaul your investment strategy every year or every month to position yourself to chase the hottest market sectors.

What you do need is a plan that is goal- focused and not market driven.

At Strathmore Capital Advisors, we believe in the power of a well-constructed plan. Ideally, that plan is one that’s customized for your situation, and takes into account such things as your own risk tolerance and long-term financial goals. It would center around an efficiently-designed portfolio that includes a diversified mix of low-cost, global investments. And you’d stick with that plan regardless of what’s happening in the financial markets.

Ultimately, your ability to stay the course and remain committed to your plan through all different types of markets is one of the most important factors in helping you to reach your financial goals over time. What the markets do in the short-term won’t have much bearing on your long-term investment results—unless you deviate from your plan and react to the markets’ periodic ups and downs.

So whatever the so-called expert is saying on TV or in your favorite financial magazine, just tune it out or turn the page. Doing so may just mean the difference between meeting your long-term financial goals and falling short.


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