Predicting the Future Is Impossible, So Avoid Market Predictions

  By Matthew Jentner
Matthew Jentner

It’s common knowledge that predicting the future is impossible. Yet each year, perfectly sane and rational experts tell investors where to put their money for the best results in the year ahead. And every time that year ends, we have more examples of the futility of making predictions.

Consider the annual Barclays Capital Global Macro Survey of more than 2,000 institutional investors. These are professional managers who are entrusted with billions of dollars of other people’s money.

When Barclays asked in late 2010 for their views on 2011, 40% said stocks would be the best asset class to own, while 34% voted for commodities. Only 10% argued that bonds would do the best. The cover of Pensions & Investments, a major trade publication for professional investors, proclaimed “For 2011, it’ll be all about equities.”

Fast forward to the end of 2011: U.S. bonds were the best performers with a gain of more than 8% in 2011. Meanwhile, the Standard & Poor’s 500 Stock Index went nowhere, not realizing the consensus prediction among the experts for 15% gain. Commodities were miserable performers, losing nearly 10%.

In another example, investment publication Barron’s recommended that stock investors go east and invest in China and other fast growing Asian countries during 2011. Unfortunately for anyone who followed that advice, they ended up getting into one of the worst markets of the year. The Hong Kong Hang Seng index and the Shanghai Composite index were each down by almost 17%.

The best antidote for all of these forecasts is an investment portfolio that avoids concentrated positions by diversifying among all major asset classes. In our opinion, global diversification with periodic rebalancing is a sound way to take advantage of market fluctuations without falling prey to hazardous attempts to predict future market movements.

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