Along with the good cheer of the holiday season comes the predictable avalanche of predictions about the future of the markets from a bevy of "investment professionals." The financial media feed us a steady dose of investment managers, advisers and economists who confidently set forth their well-articulated views, citing an impressive array of facts and figures to support their position. The softball questions posed by the journalists eliciting this information almost never include the following, which I would love to ask them:
1. What is your track record for accurately predicting market trends?
2. How do you account for random events (like natural disasters, terrorist attacks, etc.)?
3. What is the long-term track record of the fund you manage?
4. What do you know that has escaped other fund managers, since the majority of them fail to equal their benchmark in any given year?
5. What do you know that isn't known to millions of traders all over the world?
6. Isn't that information already incorporated in the price of stocks and bonds?
And my personal favorite:
7. How do you sleep at night?
It's bad enough to receive advice from these "investment professionals" without charge. It must be far worse to pay for it.
Richard Russell has been referred to as the "godfather of financial newsletters." He began publishing his market-timing newsletter in 1958. On his website, Mr. Russell touts his predictive ability, noting many accurate calls of tops and bottoms of the market. His predictions are treated with respect and almost reverence by the financial media, hungry for news of the next major market event.
Given his stellar reputation, it was newsworthy when Mr. Russell pulled no punches in his December 2011 newsletter. According to a December 15, 2011, article from Business Insider, Mr. Russell advised his subscribers to "GET OUT OF STOCKS" (the all caps were his). He believed the "current bear market rally [was] comparable to the tragic fooler bear rally that followed the 1929 crash." He warned his subscribers that "we are back in the grip of a vicious and ruthless bear." His advice was unequivocal: "Sell your stocks. Get as liquid as you can. The ultimate liquidity is Constitutional money -- gold and silver."
Mr. Russell changed his dreary prediction in March 2013. According to a blog post from the The Wall Street Journal dated March 13, 2013, he advised his subscribers to "take a chance" on the markets. As support for this advice, he observed that "after all, Columbus took a chance." I am sure his beleaguered subscribers found that bit of history comforting.
According to Yahoo Finance, on December 15, 2011, the S&P 500 Index closed at 1,215.75. On March 13, 2013, it closed at 1,554.52.
I don't mean to pick on Mr. Russell. He has been right many times. However, I am unaware of any credible data indicating that those who make predictions about the future direction of the markets are correct more than you would expect from random chance. One study of 97 market-timing newsletters that had been in existence for at least 10 years found that only seven of them beat the annualized return of Wilshire 5000 index. Those are not good odds, especially because there is no way to select "winning" newsletters prospectively.
The harsh reality is you could put out a newsletter and make predictions about future events that would likely be as accurate (or inaccurate) as those of the "experts." It's sad that so many investors are influenced by these musings, often to their detriment.
Give yourself a holiday gift. Ignore the predictive views of market pundits. It's irresponsible and potentially harmful to base your investing decisions on them.
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.