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January 5, 2014

Stock market difficult to predict, even for experts

“The members of the Barron’s Roundtable see a year of modest gains for U.S. stocks, trouble for bonds, and good news for gold.”

This was author Lauren Rubin’s lead in to her January 2013 Barron’s article summarizing the 2013 investment predictions of the financial “luminaries” who comprise Barron’s Investment Roundtable.

How did they do? Not well. U.S. stocks notched remarkable (not modest) gains surging over 30 percent. Bonds delivered mediocre but certainly not “troubling” performance of about 3 percent. Gold investors didn’t fare so well. Rather than the anticipated good news, investors in gold funds watched their shares plunge 25 percent in the last 12 months. Undeterred, Barron’s will be reconvening these “masters” of the investment universe for another round of prognostications in early 2014.

Stock market predictions are as old as the stock market itself, and this cycle repeats itself year after year with similar results: Some forecasts turn out to be remarkably prescient while others miss the mark completely.

Unfortunately for those who invest based on these predictions, the forecasters who happen to get it right one year are often not so lucky the next. The fall from guru status seems to be certain and swift. In any given year, the factor distinguishing those who are right from those who are wrong is pure chance.

A mountain of evidence collected from research conducted over the last 100 years by some the most renowned mathematicians and economists indicates that investment experts are no more able to forecast short-term market direction than the rest of us. This suggests that predicting stock market performance consistently is not merely difficult, it may actually be impossible. This fact, however, has done little to discourage the financial industry and news media from trotting out their “expert” predictions for the overall market and specific stocks for the upcoming year. There are two simple reasons for this.

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