Saturday, November 18th, 2017

Disregard all short term forecasts and predictions

When they feel uncertain, investors often look to the investment media for insights into how to position their portfolios. While reading the work of these forecasters and prognosticators may seem to provide compelling evidence you should “do something”, they usually add no real value and are more likely to detract value.

As an example of this, one study tracked the average interest rate forecast from The Wall Street Journal Survey of Economists from December 1982-December 2010. This forecast was then compared to the actual direction of interest rates. Overall, the economists’ forecasts were wrong in 37 of the 57 time periods—65% of the time!  Note that this was not looking at the size of the interest rate change, just the direction of the change, which has a default expected result of 50%, meaning the average economists’ predictions were significantly worse than flipping a coin.

I suggest that you do not waste energy worrying about unknowable and uncontrollable short term variables, like the direction of interest rates or the level of the stock market. Instead, focus your energy on things that you can control, like creating a properly diversified portfolio, determining your investment goals, true time horizon and setting realistic return expectations.

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