If you choose to consider the forecasting skill of “experts”, you should read an excellent white paper prepared by Vanguard, entitled: “Forecasting stock returns: What signals matter, and what do they say now?”The authors reviewed a number of indicators typically used to forecast U.S. stock returns. They concluded that forecasting stock returns is “essentially impossible in the short term.” Even over the long term, commonly used predictors “…have had little or no power in explaining the long-run equity return over inflation.”
The ramifications of this well-researched analysis are profound. Much of the securities industry is premised on giving advice about the direction of the markets. Relying on this advice has very negative consequences. It distracts you from determining your capacity for risk, diversifying your portfolio, low fees and taxes. Of course, if you focused on these factors, you would quickly conclude that your interest is not served by using brokers or advisers who purport to be able to “beat the markets”, using their predictive powers.
My prediction for 2013 is that, if you reach this conclusion and fundamentally change the way you invest, you will be investing responsibly and intelligently. You will also avoid becoming a victim of the securities industry.
The first question you must ask yourself is are you an investor or a gambler? If you are a gambler you should look for all the predictions you can. However, if you are an investor you should develop a prudent portfolio and remain disciplined.
Please comment or call to discuss.