If you are like me, your email this month is full of Holiday invites, year-end offers, and requests for charitable donations.
December is also the month those market guesses (politely referred to in the industry as “market forecasts”) begin to pour into my inbox from seemingly every investment firm and advisor on the planet.
While I confess these forecasts to be highly entertaining (Barrons Roundtable has been my personal ritual for 41 years) they are neither useful nor beneficial for investors saving for retirement. In fact, they can actually be harmful to your long-term retirement outcome.
The widespread practice of producing annual market predictions is one of the worst tendencies in the retirement industry. Investors whose goal it is to fund their child’s future college expenses or retirement income are by definition looking to compound their returns over many years. A one year time horizon is both irrelevant and reinforces an emphasis on short-term thinking that can actually harm most retirement participants.
“The widespread practice of publishing annual market predictions is among the worst tendencies in the retirement industry.“
Just think about that for a minute. If your time horizon is one year, you should not even be in the market. And if you are in the market, you better be right.
It should not be surprising to anyone that these Wall Street experts make excellent guests on the financial networks. After all, the producers at Fox Business News and CNBC have much to gain by simply keeping alive the mistaken belief that smart people can routinely predict what the market will do in the short term.
As we tune in to watch these Ivy League educated experts in $3000 suits discuss their current macro theory – weaving together monetary policy at the Federal Reserve, geopolitical threats and a massive developing short position in soybeans – we observe an impressive human ability for higher order thinking and pattern recognition. What we don’t often see is that these strategists are seldom right about what actually takes place in the markets during the next 12 months.
So why is that the case?
Daniel Crosby, an expert in the field of behavioral investing, offers us some compelling clues based on normal human behavior. He compares these market wizards to “a game show contestant who has overcomplicated the task by half”.
In Crosby’s view, set out in an outstanding article titled, Are You Smarter Than a Rat, “the elegance of the story has overtaken the likelihood of its occurrence.” 1.
The elegance of the story has overtaken the likelihood of its occurrence.Daniel Crosby on market forecasts.
In other words, it sure sounds smart even though it probably will never happen! According to Crosby, even a rat makes better decisions than a human, because he simply acts on what will probably happen most of the time.
Most of us should learn to think like a rat. But believe it or not, that’s harder than it seems
I have always wondered why market strategists get paid big bucks by their investment firms to make forecasts which have a little probability of working out as advertised. For example, few experts this January predicted that the S&P 500 would be up 23.16% through October 31 when the same benchmark actually declined 13.52% in the 4thquarter of 2018. Even fewer these experts forecast the whopping year to date annualized return of the S&P U.S. Treasury Bond Current 30-Year Indexof 24.03%. Who saw that coming?
You should know that while the individual forecasts themselves are seldom correct, their authors always hedge their bets, usually imbedded in fine print in the footnotes:
“These views are subject to change without prior notice.”
I consider myself fortunate to have known some very successful investors in my 30+ year career in the financial services industry. When asked for their market forecast, most have no grand thesis or series of dominoes waiting to fall. Rather, they will talk about a disciplined investment process as being the key to investment success. To them, the rest is just crowd noise.
To be clear, these investors are usually not invited to participate in CNBC’s year end roundtable. If they do come on, they are seldom invited back (unless your last name is spelled B-U-F-F-E-T ). Sadly, when it comes to financial new shows, there is far more demand for sophisticated nonsense than boring-but-true market wisdom.
When average retirement fund participants hear these forecasts, they think they should be looking at how their portfolio will perform next year. There is an urge to “do something” and therefore believe that the more engaged they are, the better their returns will be. In practice, the exact opposite is true.
Investors who have a sound, disciplined process and make infrequent portfolio changes are far more likely to do better over the long term. As Crosby explains:
Common Sense Investment Advice
For an investor saving for retirement, here are three practical ways you can boost your success:
Disengage from the day-to-day fluctuations of the market.
Ok, on the surface this may sound irresponsible. But for most of us, our ideas about money are very much tied to our emotions. The inevitable short term market changes often trigger fear of loss or inspire a false optimism that cause us to make poor decisions. The more we can emotionally disengage with day to day market changes, the better our long term results
Throw away your account statements.
This is another radical practice, but I know a lot of successful long term investors who operate this way. I highly recommend it for those who tend to be emotionally impacted by short term market volatility. Market declines are always temporary, but the urge to “do something” often produces activity that results in permanent loss. I know a lot of 401(k) participants wh refused to open their statements during the last recession. Most of them are glad they did!
Seek professional advice.
One of the biggest mistakes I see investors make has to do with ego and the belief that they are smart enough to do this on their own. An experienced advisor can help you with some of the heavy lifting such as creating a custom portfolio allocation based on your goals and needs. But in my opinion, the true value of seeking investment advice is simply gaining objectivity when markets are volatile. Good investors have mastered their emotions. An experienced advisor can help you overcome making emotional decisions when often the best course of action is to do nothing.
As we head into the new year, I suggest that you ignore the annual investment forecasts. Sure, they can be highly entertaining but they are not likely to be predictive of what happens in the year ahead.
Instead, focus on saving more, worrying less and living in the world of a process-driven path!
Brian C. Rall- President, Strategic Retirement Partners, LLC
- Daniel Crosby, “Think Like a Rat”, November 2017
Strategic Retirement Partners is an independent, boutique investment advisory and consulting firm providing plan design, vendor search, investment selection, fiduciary guidance and participant education for company sponsored retirement plans.
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