Economic Predictions: Don’t Believe Them

It is just human nature. We want someone to tell us what’s going to happen in the coming year. And we want that person to say it with conviction. The surer someone is of his or her forecast, the more interesting and believable it becomes. There is no better way for a financial advisor (like myself) to get more attention for my emails, blog posts, and speaking engagements than to take strong and preferably controversial positions. There also does not seem to be much of a penalty for predictions that do not materialize. Nevertheless, I don’t make economic predictions, and here’s why:

Economic predictions are notoriously wrong:

History is littered with bad predictions. Even very smart people with lots of data and charts get it wrong. I don’t know of a single economist who predicted the stock market would be up more than mid-single digits in 2017. Kiplinger Top Predictions of 2017 forecasted the stock market would return 4-6%, including dividends. Actual returns…the S&P was up over 20% YTD. Another great example is when legendary economist and Federal Reserve Chairman Alan Greenspan famously stated that the stock market was exhibiting “irrational exuberance” on December 5, 1996. Many people thought that meant they should get out of stocks. The S&P subsequently returned 33% in 1997, 28% in 1998, and 21% in 1999.

Economic predictions oversimplify:

Forecasts for the stock, bond, commodity, and real estate markets make too many simplifying assumptions. The actual behavior of these markets will be based on the decisions of millions of buyers and sellers. We can guess how they will act, but only based on the information available today. Unfortunately, that doesn’t help much because the information available has already been factored into current prices. This happens almost instantly when new information becomes available. The real driver of future prices is information that is not yet available. Nevertheless, forecasters pick a few selective facts or trends to back up their predictions and that is enough to convince lots of people.

Economic predictions lead to bad behavior.

The keys to financial success for most households are good financial habits around savings and spending, a good financial plan, and a well-diversified long-term investment approach. Predictions influence investors to do the opposite. They unintentionally lead to wealth-destroying behavior such as: trying to time markets, putting too much of your portfolio in one thing (concentrated positions), and fickle risk tolerances that change at the wrong time for the wrong reasons.

Final thought:

Just like it became cool to be a nerd, I am hoping that boring will become sexy. Boring old systematic saving, investing, diversification, and a consistent risk tolerance work. So my only prediction is: Investors who have a plan and stick to it will fare better than those who don’t.

On a semi-related note, check out: The 15 Worst Tech Predictions of All-Time.

P.S. I hope this year will exceed all of your expectations. Happy Holidays and Happy New Year!