Futile Forecasts

Photo by NOAA on Unsplash

Well, it's here! The new year, 2025. Crazy to think we are a quarter of a century into the 21st century. As we enter this new year, it can undoubtedly be overwhelming at times to be bombarded with forecasts and predictions for the upcoming year, not to mention the daily breaking news after our recent election. So many questions can plague us regarding the markets, like where we should invest, when interest rates will change, and of course the ever-present musings about inflation.

Many experts, and of course your self-proclaimed financial expert-of-a-neighbor who happens to take the trash out at the same time as you, have opinions about what the markets will do this year. And though some of it may be based on reasonable analysis, the thing is, we have no way of knowing what the future holds with any degree of certainty whatsoever.

I read a lot about the economy, and I think hearing experts' thoughts about what's coming can be interesting. But I don't think we should be making changes to our long-term investment strategy based on short-term guesses (and, yes, that's what they are) about what's going to happen. Because even when people do "know the future", it doesn't seem to go too well.

Wish you had a crystal ball?

As do we all sometimes. But when it comes to investment forecasts, they are basically more useless than I am as soon as the temperature falls below 62 degrees.

The Wall Street Journal recently highlighted a fascinating experiment that was conducted to test whether investors were able to increase their investment returns when they had access to news headlines in advance. The experiment was called the "Crystal Ball Trading Challenge" and participants were given a starting bankroll amount, a daily investing target, and the premise that they were trading the S&P 500 stock market index and a 30-year US Treasury bond futures contract. They participated in 15 "days" of trading where they were given the front page news of the Wall Street Journal one day in advance and instructed to make trades accordingly.

And what happened? Basically, participants guessed the correct direction that stocks and bonds would go only about 50% of the time, based on the daily news they received in advance. Now, I'm no mathematician but it seems you'd have similar odds flipping a coin! And as for the return on their investments, more participants lost money or broke even than those who managed to make a profit. So in the end, methinks having a crystal ball is no guarantee of making sound investing decisions.

Now of course, this is a specific experiment with limitations and assumptions, but it does give an example of how hard it is to guess the reaction of the stock market ... even if we know the headlines in advance. Click here for more details and the full article explaining this study.

Stay the course

Why do I share this experiment with you? Well if any of you know me or have worked with me as a client, you know that no matter the number of forecasts and predictions we receive, I always advise to stay the course.

According to investing legends Warren Buffett and Charlie Munger, short-term forecasts aren’t useful in the least. In fact, the word "useless" may even be generous:

“Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.” - Warren Buffet

Hmm, "worse than useless". That’s interesting coming from arguably two of the best investors the world has seen.

So why avoid forecasts? 

I would argue that predictions and forecasts about the markets are more a source of risk rather than a tool to help you avoid risk.

Why?

It’s because if they cause you to invest differently, you could miss out on some of the best days/years of the stock market. Missing out on those returns increases the risk that you won’t meet your investment goals and that your money may not last as long as you'd like.

I’ve seen many examples of this over the years, with people selling their stocks because the market was “too high” or was “about to crash”. One of the problems with taking this type of approach is that you have to time things right twice. First, when to sell. Second, when to buy back in. It usually ends poorly.

To sum up

I think it’s best to just stay clear of these forecasts. Or, go ahead and look at them (if you must), but don’t take any action based on them. As the investor man himself said,

“Market forecasters will fill your ears but never fill your wallet.” – Warren Buffett

Keep these things in mind as we continue to hear how the year 2025 is going to go.