The folly of forecasts

By Sam Whybrow, Lubbock Fine Wealth Management LLP

People love to make predictions, especially in January, when everyone is looking forward to the year ahead. At the start of every year I like to have some fun and review fund manager and economist predictions for the forthcoming year. According to a poll of over 120 fund managers, emerging markets is expected to be a key growth area this year along with US equities, global equities and multi assets. The predicted worst performers are seen to be investment grade and high yield credit. I believe that accurate forecasting is practically impossible, and, even when a prediction turns out to be accurate, it is hard to say whether it was the result of luck or skill. 

Who could have predicted crude oil falling from over $100 to $45 a barrel, or that interest rates would not go up and bonds would do expectedly well!  

Rather than relying on predictions for my investment strategy, as many people do, I prefer to make assumptions based on decades of evidence from market data and academic analysis: a non-predicative investment strategy rather than a predictive one.

I watch Match of the Day and it is amusing how many times the so-called 'experts’ predict the wrong result. There are so many variables to consider when predicting a football match, just as there is in global markets, economies and politics - all of which affect your investments. Bookmakers thrive on their customers making predictions as do investment markets. Have you ever seen a poor bookmaker?

Instead of making predictions I assume that: 

  • Capitalism will remain the world’s pre-eminent economic model and will continue to provide a steady return to those invested in it. 
  • On average, certain types of security will perform better than others over time, so it is worthwhile focusing on those in a portfolio. 
  • Holding a high number of securities will help manage risk and increase the reliability of investment returns.  

You could argue that these statements are predictions themselves because they relate to future events. But which would you rather have form the basis of your investment strategy? These three statements - or, as is the case with many conventional investment strategies, the changing guidance of a small group of investment insiders (or so-called experts)? 

Some forecasts, however, are worth making in relation to your financial planning - generally those over which you have a degree of influence. For instance, when you plan to retire and how much money you will need to meet your future financial commitments. Sensible judgments like these are key to forming an effective financial plan. 

Making fun forecasts about sports results or speculating about the direction of the dollar or the fate of the eurozone is one thing. Basing an investment strategy on them is something else altogether.

If you would like to know more about how LFWM could assist you, including with lifetime cash flow planning, please do get in touch.

samwhybrow@lfwm.co.uk. 020 7490 7766.

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