Back in December, we poked a little fun at the expense of Goldman Sachs in a post that started off talking about the investment performance of gold, but really was more about the ridiculousness of short-term market forecasts. (Goldman Sachs Bravely Predicts that Gold is Not a Promising Investment…After it Drops 25% in 2013)
Now as we start a new year, the “top” stock market forecasters have released their predictions as to where the S&P 500 Index (a good proxy for the overall US stock market) will end up by the end of 2014. The S&P 500 closed on December 31st at a level of 1,848. On average, forecasters believe that the index will end 2014 at around 1,949, for a gain of about 5.5% (not counting dividends).
Given what happened in 2013, that sounds pretty...boring. But before we all go off and adjust our financial plans and investment portfolios, let’s keep in mind one of the lessons of the Goldman Sachs post: very few, if any, forecasters tell you how good their previous predictions have been. And even fewer investors bother to remember what the forecasts were in the first place.
Luckily, research firm Biriny Associates has already done the heavy lifting for us. As reported in the December 20th, 2013 Wall Street Journal, 11 strategists from some of the largest firms on Wall Street predicted that on average, the S&P 500 would gain about 8.2% in 2013.
Actually, the index gained about 29%, including dividends. In the words of Agent Maxwell Smart, they, “… missed it by THAT much. “
Maybe 2013 was just a tough year. Given how much time and money is spent on the complex forecasting formulas (and accompanying stock-picking strategies) used by major Wall Street firms, you would think they would do better than a naïve investor who just used historical averages to forecast market returns…right?
Wrong. According to a Wall Street Journal analysis:
“Say that at the end of each year, you found the median annual change in the S&P 500 since 1929 and used that as your guess for the next year's price change. For example, in 2006, your guess would have been 9.06%—the median price change between 1929 and 2005. That method would have beaten the strategists half the time since 2000…”[i]
So what’s a poor soul to do? The answer – as it has always been – is to ignore, ignore, ignore. Someday, the overwhelming, crushing evidence that people just can’t consistently forecast stock market returns might make its way to CNBC, Bloomberg News and Yahoo! Finance.
But until then, it’s our job as reasonable people to tune out the screaming heads and attention-grabbers, and focus instead on our saving, spending and long-term financial plans. We can safely predict that’s what we’ll be doing at Woodward Financial Advisors in 2014.