EagleTribune.com, North Andover, MA

January 5, 2014

Stock market difficult to predict, even for experts

Financially Speaking
John Spoto

---- — “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.

First, the financial payoff for those who are lucky enough to guess correctly is enormous. Investment gurus provide the marketing hype for their organizations. Guess right and the advertising and promotional machine cranks up. Guest spots on CNBC, articles in the financial press, and promotional material touting superior investment returns has the powerful affect of attracting a flood of new investors and millions of dollars in assets to the organization. Guess wrong and they defend their positions with a cleverly worded rationale and complicated charts. Thus, there is no downside to making a prediction so long as it is remotely plausible.

Second, despite their questionable value, these predictions remain popular with a less experienced investing audience. For most Americans, especially those nearing retirement or already retired, their wealth is materially affected by the rise and fall of stock prices. The stock market represents a complex system that is affected by multiple factors, including expectations of future economic and geopolitical conditions as well as random events.

Studies in behavioral finance suggest that when making decisions in the face of such uncertainty, people tend to rely on those who are seemingly able to offer predictability in otherwise unpredictable situations. There are plenty of investment professionals who are happy to offer that predictability. Smart investors will recognize their limitations.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.