Be Wary of Bold Financial Predictions for the New Year

Acting on them in January 2017 could have harmed you by June.

Loud Voices You Should Ignore - from article

Are you able to predict what’s going to happen next in the financial markets? Of course not. No one can. Can you even tell what’s already happened?

Here’s a quiz: See if you know which of the following investment categories made money and which ones lost money. Your choices are wheat, hogs, rice, natural gas, sugar and orange juice.

Stumped? No problem. Lots of people don’t follow the commodities markets.

However, you do purchase these goods each week, whether you think of them as a commodity or not. Maybe you had rice for dinner last night or started the day off with a big glass of orange juice. Thus you’re probably aware of the prices of these commodities — just in a different sense.

So, going back to the quiz, who would have guessed that the best-performing asset class for the first six months of 2017 would be wheat, which was up 29 percent? Hogs were up 27 percent, and rice was up 23 percent. By the way, to put this into context, the S&P 500 stock index was up only 8.2 percent for the first six months of this year.

Too bad you couldn’t have predicted those results.

On the other hand, what if you had believed that natural gas would be up and put your money on that? It was down 17 percent this year through June 30. Sugar was down 29 percent, and orange juice was down 32 percent. Can you imagine the scenario if you had put your life savings in orange juice futures? You would have lost one-third of your money in just six months.

The point is that no one can possibly predict market movements for any short period of time. Yet you often hear so-called experts loudly doing just that on TV, on the radio, and in magazines and newspapers. They’re all trying to tell you what is going to happen over the next few hours, days, weeks or months.

How do they typically fare? To find out, The Wall Street Journal interviewed several leading economists and market experts on Wall Street early this year, asking what they expected to happen on the economic front during 2017. After six months, the Journal compared their answers to what actually happened, and here are some of the results:

● The experts’ consensus was that the S&P 500 stock index would grow 5.5 percent this year. In fact, the index was up 8.2 percent after six months and on pace to end the year up 16.5 percent.

● The Journal asked what would happen to interest rates on the 10-year Treasury. The experts believed that because of tightening by the Federal Reserve and policies of the Trump administration, interest rates would rise. Wrong again. Those rates went down.

● The experts also said the U.S. dollar would rise due to President Trump’s economic policies. But at this writing the dollar is down 5 percent in foreign trading. How about the Mexican peso? Trump expressed his attitude toward Mexico. He wants to revise trade agreements with Mexico and build a wall. Based on that, the consensus was that the Mexican peso, relative to the dollar, would decline. However, the peso was up 14 percent in the first six months.

● The experts predicted that, based on Trump’s business policy proposals, financial stocks would rise dramatically above the overall market. But that’s not quite the case. Actually, they were up only 6 percent in six months, while the overall market is up 8.2 percent. There was also a consensus that market volatility would increase sharply in 2017, but instead (at this writing) it’s at the lowest level in two decades.

● What about oil? Many thought oil prices would stabilize. However, prices are down 14 percent. Since the experts thought oil prices would be stable, along with Trump’s policies on the economy, everybody figured inflation would average 2 percent this year. But inflation actually is running at around 1.4 percent, the Journal reported.

It’s clear that not even Wall Street experts who track the markets daily can predict what will happen next, let alone average investors.

Therefore, ignore what the pundits say, and don’t make an investment decision based on what’s happened in the past.

Instead, concentrate on these three things:

1. Build a diversified portfolio on a global basis, and own everything all the time. That way, you don’t have to worry about what’s up and what’s down.

2. Plan to hold your portfolio for decades. It’s all about long-term retirement planning.

3. Rebalance your portfolio regularly. Often, certain asset classes within your portfolio rise or fall more than others. Rebalancing keeps your percentage allocations where you intend them to be.

We do these things for you as our clients. We can do the same for others who are close to you. Feel free to refer them to us.

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