One common question we get around this time of year is: “What’s your outlook for stocks this year?”
Makes sense that we’d be asked that. After all, we are financial advisors. Plus, financial media and Wall Street itself loves opining on the latest annual forecasts. If you’re interested, Bloomberg even summarizes many of them here.
Unlike Jesus of Nazareth who said, “no prophet is welcome in his hometown”, prophets are far too welcomed in investment spaces. And often they’re not very prophetic. Bob Seawright, in his The Better Letter, recently wrote,
In late 2020, Barron’s surveyed market strategists and chief investment officers at large banks and money-management firms on their stock market outlooks for 2021. Averaging their year-end S&P 500 forecasts, which ranged from 3800 to 4400, the group expected the index to rise some nine percent last year, to about 4040 (Bloomberg did something similar; its average of 22 estimates was 4,074). JP Morgan was the most optimistic, calling for a 4400 closing level. Goldman Sachs predicted 4300. The S&P 500 closed 2021 at 4766, up nearly 27 percent, before dividends. With dividends, it earned 28.7 percent. Thus, none of these alleged experts was anywhere near right.1
I’d like to turn the tables on the question we get asked at the beginning of the year. What’s your investment forecast?
And let’s up the ante. Write it down.
I got this idea from one of the financial columnists I read. He recommended taking the time to write down what you think will happen in the investment world within particular categories and then put it away for safekeeping to revisit at the end of the year to see if what you thought would happen happened.
Let’s do six:
- What will the closing price of the DOW be on Friday, December 30, 2022?
Wait. Getting specific is hard, huh? Do it anyway.
OK, I’ll go easier on you and make it more general to give you a 50/50 chance. Make sure to make your predictions with the same 12/30/22 date.
- Will inflation (via the year over year Consumer Price Index) be higher or lower?
- Will mortgage rates be higher or lower than where they are today?
- Will oil prices be higher or lower?
- Will the price of gold be higher or lower?
- Will the price of bitcoin be higher or lower?
Are you finished? Good.
The exercise is important because it can illustrate hindsight bias. All of us tend to think we would have known and predicted the outcome of something after that something happens. Think about how often you might exclaim, “I knew it!”
Well, let’s put that to the test. Who knows? You might pass the test with flying colors. Try to pass it every single year consistently though. I bet you won’t.
As far as what our forecast is. I’m not telling. I will write my answers down though and check next year.
Remember we aren’t here to make predictions. We are financial advisors, not financial forecasters. We are here to do our best to manage risk so that you can live and leave a legacy.
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Sources:
1. https://betterletter.substack.com/p/the-better-letter-forecasting-follies-d5a