Market outlooks and year-end forecasts: Should you care?

Market outlooks and year-end forecasts

As we approach year end, if you own investments, you will likely receive communications from your mutual fund companies concerning their market outlook or year-end forecast for the coming year. In my past life, I used to oversee the publication, distribution and communication of such documents. As is, I’ve read my share of market outlooks and forecasts produced by various financial institutions.  Here are some of my findings/thoughts:

·        Markets are driven by many different variables, so it’s impossible to accurately and consistently predict future outcomes.

·        Forecasting is tough business, and forecasters are often wrong.  If forecasters were often right, they probably wouldn’t have to work as forecasters.

·        Forecasting can create an echo chamber where prevailing market narratives (e.g., direction of interest rates) get picked up by different news outlets and competing market analysts and then repackaged for public consumption as divinations from economic experts.

Market outlooks and year-end forecasts: Should you care?

No.

Many people think that to be successful investors they need a leg-up in gathering superior information.  The minority with special access will rely on insider information, while the majority without special access will depend upon market outlooks and forecasts to help guide their investment decisions.  Unfortunately, the former method is illegal, while the latter method is typically inaccurate or, if accurate, contains information that’s widely known and accepted that it’s already priced into the market.  Thus, there’s no longer an opportunity to leverage the information for superior gains.

Still, there’s a persistently large and loyal following for market outlooks and forecasts. One reason may be the public’s pervasive belief that the experts really can forecast the future and that they are doing their due diligence by reading such forecasts prior to making changes to their portfolios.

The fundamentals of successful investing

Successful investing is counter-intuitive.  This is probably why it’s difficult for most people.  Rather than look to economic experts for insights, it’s best to look first and foremost to yourself.  While you can’t predict or control market outcomes, you can (to a greater degree) predict and control yourself.  In my opinion, here are the fundamentals to successful saving and investing:

·        Save more and spend less. A high savings rate can cover a multitude of sins: market downturns, job loss, unexpected expenses, etc.  Studies show that a high savings rate (rather than high returns) is a more powerful and dependable determinator of successful retirement savings.[1]  Most working Americans are eligible to invest in employer-sponsored or self-directed retirement plans: 401k, traditional IRA, Roth IRA.  By simply saving in these plans, you receive guaranteed returns:  1) tax savings via deductions 2) tax savings via deferral of capital gain tax 3) possibly an employer match.

      Additionally, when you save more, you are forcing yourself to spend less.  And, when you learn to live on less, there’s less pressure to chase high returns or avoid low returns via market timing.  So, by saving more, you create a virtuous cycle that helps ensure a more secure retirement.

 ·      It’s time in the market rather than timing the market.  Since we’re constantly bombarded by financial news (or noise), it’s tempting to listen and then react to the constant siren calls to buy today and sell tomorrow.  Unfortunately, it’s difficult to distill fact from fiction and to not react.  Over the past three years, in the majority of client meetings that I’ve been in, people will inevitably note that the market has had an incredible run-up and that experts are saying that we’re overdue for a correction. As is, clients want to know how they can reposition their portfolios (more conservatively) for the upcoming downturn.  

       Market timing is a fool’s game.  A typical portfolio (70 percent stocks and 30 percent bonds) has enjoyed an annualized return of 10.17 percent over the past 3 years (ending November 30, 2019).[2]  If you’d shifted too much out of stocks, you would’ve missed a good portion of that return.

      Additionally, research shows that stock returns are quite inconsistent as market movements are unpredictable and occasionally volatile.  Missing out on some of the biggest days of returns could greatly damage your portfolio’s overall return. (See graph below.)

     

       Source: “6 tips to navigate volatile markets,” Fidelity, 2019.

       Since no one really knows what markets will do from day-to-day, it’s best to create an investment strategy that you can stick with for the long-term (10 years or more).  The longer you are in the market, the lower your risk will be.  First, during a downturn, you will still be collecting dividends as you wait for the market to recover.  Second, by staying in the market, you ensure that you will benefit from the inevitable recovery.  For many investors, especially those in the wealth accumulation phase, one of the best investment strategies is to set it and forget it.

·       Keep investment costs low.  For most people, a broad-based index fund (e.g., Vanguard Total Stock Market, Vanguard Total International Stock Market) is a great investment holding for well below the cost of most managed (active) funds.  As of 2018, the average annual fee for an index (or passive) fund was 0.16 percent while the average annual fee for an active fund was 0.67 percent.[3]  

       Unlike other industries, in the financial industry, you typically don’t get what you pay for.  After 10 years, 85 percent of active large cap funds trail the S&P 500.  After 15 years, that gap widens to 92 percent of active large cap funds trail the S&P 500.[4]  This is mainly due to the fact that active funds usually charge higher fees than passive funds.  So, they’ve created for themselves a higher hurdle to jump over in order to beat passive funds.  (NOTE:  This dynamic of low(er) performance and high(er) cost is persistent across mutual funds, regardless of market cap.)

Successful investing is counter-intuitive 

Successful investing is like successful gardening.  Pick your plot, diversify your plants, water them regularly, and let nature (“the market”) do the rest.  Within this context, economic experts are weather forecasters who are constantly making and updating their predictions.  (It’s their job.)  While you may want to be aware of their forecasts, you shouldn’t actively heed their advice by changing plots, changing plants, changing watering cadence, etc.  Doing so will likely lead to a poor harvest.  Given the ubiquity of the media, it’s difficult to tune out market forecasters (and pundits) completely.  However, it’s critical that you check your impulses by reminding yourself the limits of their predictive power.

Truth is, you alone hold the key to your own financial freedom.  Rather than listen to false prophets, focus on doing a few critical things right for a really long time and you’ll be better off than the majority of investors.  And, that’s one prediction I stand by.