The Trap of Forecasts

By Aradhana Kejriwal   |   June 9, 2014

Many people ask what the stock market will do next. It is a common question that gets even more common when the market corrects a little or surges even higher.  We all know that the short-term market movement is unknowable; yet, we all look for an answer as to what the future holds.

We seek the most reliable forecast, a guru that has correctly forecasted the markets at least once. Yet, with very few exceptions, market and economic forecasts are little more than guesses. In the Consensus Forecasts report, economists predicted that not a single economy would fall into recession in 2009. In reality, 49 of the 77 countries considered fell into recession that year. Another example of the failure of forecasting was revealed in the 2001 International Journal of Forecasting which published an economist’s survey of the accuracy of economic forecasting during the 1990’s.  The survey found that the economic forecast failure rate was virtually unblemished.

That finding is extraordinary.  Just to be clear, we believe that many experts throughout the world have thoughtful insights.  However, a forecast is just a guess and certainly not a guarantee.  Investors should not put much stock in them.  As the saying goes, even a broken clock is right twice a day.  If you follow enough forecasts, there is a probability that at least one will be right. The problem is that no one knows which forecast will be right and if the person who happened to get it right last time will be successful next time, and the time after that.

Meredith Whitney, a former analyst on CitiBank stock, showed remarkable prescience by correctly forecasting the credit crunch.  But she then made an outlandish prediction about the municipal bond market performance and defaults for Year 2011.  You may recall her appearance on “60 Minutes” in 2010.  Whitney’s prediction was utterly off base.  Municipal bonds outperformed expectations in 2011 and there were very few defaults, making her second, very public prediction one of the worst financial predications of the last few years.

So the next time you are tempted to change your portfolio’s allocation based on a forecast you have read or heard somewhere, or one that you came up with yourself, you might be wise to think again. Do you really want to bet your hard-earned life savings on someone’s guesses?  Perhaps your time would be better spent focusing on your goals.

Aradhana Kejriwal

About the Author

Aradhana Kejriwal, CFA®, is JOYN's Chief Investment Officer and co-chairs the Investment Committee, which formulates and implements the firm's investment philosophy, strategies, processes and procedures. With 19 years of investment experience, she's a popular industry writer and speaker.

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