Predictions…What Are They Good For?

At this time of year experts are predicting what the equity markets will do for the coming year. We are continually looking for answers.

  • What will the future bring?
  • Where will the markets go in 2014?
  • Where is the best place for my investments?
  • How can I earn stock market returns with Treasury bill risk?
    Predictions of New Media ala 1974
    Predictions of New Media ala 1974 (Photo credit: Dan Zen)

These are really all unanswerable questions. No one can predict the future with any consistency. However, we as humans continue to search. Many of us read our astrology message each day. Hoping we can learn what will happen to us each day. Even here there are times when these readings appear right but again there is no consistency. When these readings are right it is a matter coincidence rather than some psychic ability of the writer.

Investors continually look to someone on Wall Street or anywhere for that matter to tell them how and where to invest. This search continues regardless of the poor track record of these predictors. For example the prestigious magazine ‘The Economist’ made the following prediction at the beginning of 2013. The magazine noted that while investors were optimistic, the coming year was unlikely to be one to remember.

Another magazine ‘The Financial News’ stated “the political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall seismic political events.” Obviously neither of these predictions proved accurate.

As 2013 comes to a close the equity markets have had a stellar year.

Regardless of these and other inaccurate predictions, investors continue to search for answers and continue to read and absorb these and other publications. Many investors tell me that the stock market is too risky for them. This is true when your strategy is to listen to the ‘expert’ forecasts and basing you investment allocation of those predictions. When you base your investment strategy based on a forecast of the future you are gambling and speculating with your money.

The real problem is when one of these ‘forecaster’ is right, which is statistically inevitable. These predictors will market this fact extensively.  What investors don’t seem to realize is that there is no correlation between past performance and future results. Like I said some of these forecasters will be right but there is no reliable way to know which one(s) will be right going forward.

Dr. Eugene Fama of the University of Chicago won the Nobel Prize in Economics in 2013

for his work on efficient markets. Dr. Fama essentially proved that all knowable information is already in the price of the security. There is no reliable way to predict how the markets will perform going forward.

Throughout my career in financial services I have also continued to search for the ‘answer’ with some success followed by poor results. I finally remembered by finance courses in both college and graduate school. In my studies I learned that there is an academic and scientific method to investing that has proven to be successful in the long term. The issue is that these methods do not eliminate risk but rather work to control it.

Investors would be more successful with less anxiety if they worked with an investor coach. An investor coach will teach you among other things where returns really come from. HINT: it does not come from the hot stock picker or market timer or the manager with the best track record.

Trying to adjust your strategy based on current conditions will result in poor and disappointing results.

When you have a prudent process and the discipline which an investor coach will provide, success will be yours WITHOUT the need for an accurate forecast.

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“Those Who Plan – Profit”

Steve Van Remortel president of SM Advisors a Green Bay based expert strategist has a tagline for his firm of “Those Who Plan  –  Profit”. It means exactly what it says you will earn a better profit if you develop and follow a plan. Steve has used this process to help a large number of businesses become successful and earn a profit.

English: Eugene Fama receiving the inaugural M...
English: Eugene Fama receiving the inaugural Morgan Stanley-American Finance Association Award from Rick Green (Photo credit: Wikipedia)

This process works very well with investing as well. When you develop a plan and remain disciplined to your plan you will profit over the long term. In most cases like SM Advisors it requires a coach to keep you disciplined. In this case it requires an investor coach.

Since becoming involved in the financial services business in 1992 I have learned that the Wall Street bullies would prefer that you do not have a plan. These bullies would prefer that you invest based on your emotions. They would have you listen to the financial media and trade…trade…trade..

These bullies want nothing more than to have you gamble and speculate with your investment money. A sure sign that you are gambling and speculating would include:

  • Stock picking.
  • Market timing (getting into and out of the market at the right time based on some murky predictions).
  • Track record investing (investing with the ‘hot’ manager or the latest ‘hot’ trend).

In 2013 Dr. Eugene Fama won the Nobel Prize in Economics based on his Efficient Market Hypothesis. In his award winning hypothesis Dr. Fama states

“In [a free] market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.

Another way of saying this is that free markets work and if you believe that

  • Based on supply and demand the free market is the best determinant of market prices.
  • All available information is factored into the current price.
  • Only new and unknowable information and events change pricing.
  • The randomness of the market makes it impossible for any individual or entity to consistently predict market movements and capture additional returns unrelated to risk.

You will invest using free market investment strategies. Dr. Fama’s Efficient Market Hypothesis needs to be included as one component of that strategy or PLAN.

You can continue to plod along hoping you can increase your return by trading in and out or you can develop a solid plan.

Remember any trade(s) that require an accurate prediction of the future will eventually fail.

A great first step is to determine your current expected return and expected volatility(risk).

With this vital information you can begin to plan for a successful long term financial goal, such as retirement.

Because  as Steve Van Remortel states “Those Who Plan  –  Profit’.

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