Beware of Market Forecasting

Utah Investors: Beware of Market Forecasting

By Dave Young, President of Paragon Wealth Management

There’s no shortage of self-proclaimed market prophets in Utah and throughout the nation. You can find them in the investment magazines, newspapers or CNBC. Although they can be entertaining, they provide no real investment value. They do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.

The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck maybe half of these predictions are proven right-meaning that at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. Those many forecasts that don’t pan out (and those many investors who are financially hurt by them) are never spoken of again. In truth, you’re much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least they inflict less damage when they’re wrong.

Yet despite mountains of data that show how ineffective the celebrity market forecasters are, they continue to make their predictions and many unfortunate people continue to base their financial decisions on shoddy, unproven advice.

Market professionals are not alone in their inability to forecast market behavior. Economists do just as poorly. Every six months the Wall Street Journal prints the results of a survey of leading economists who predict the level and direction of interest rates for the coming six months. 55 high profile economists currently participate in this semiannual forecast. You’d think such prestigious economists in such a high profile newspaper would know what they’re talking about, right? Nope.

If they’d just blindly guessed they’d have a 50/50 chance, but their actual educated predictions turn out to be much worse. And these are the best the industry has to offer!

So if forecasts are a waste of time then what does work? I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy-even the gut feelings of so-called experts.

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