Peace Ahead, Good News for Markets?

13 June 2018

Most of us in Singapore would have been swept up by the widespread international news coverage or affected by traffic delays over the last few days, due to the recently-concluded Singapore Summit between the leaders of the United States of America and the Democratic People’s Republic of Korea. For investors, the positive atmosphere it generated prompted market-watchers and strategists to predict possible risk-on appetites, due to the perceived better times ahead for Asia and, in particular, South Korea. Bloomberg published an article providing tips on Singapore stocks which may benefit from the widespread publicity and also another article on how investors took a punt on Asia prior to the summit. At the same time, there were other reports which commented that nothing much was achieved and that it would take a long time to change the status quo.

In light of the conflicting reports and themes, what should investors do? Bearing in mind that making bold (and sometimes audacious) forecasts is the bread and butter of the vast majority of the financial industry and media, it should come as no surprise if your banker or investment advisers shared some exciting investment ideas for you to act on as a result of the summit. Week after week, there is no shortage of economists, strategists, asset managers and bankers (including yours) offering their opinions on where the markets or individual stocks are headed based on a trending topic.

This is all well and good for a conversation over beer with friends, but basing your investment strategy upon such opinions is foolhardy and harmful to your hard-earned savings.

In the current information age, where such past predictions and news are easily searchable on the Internet, it is easy to check how accurate those previous forecasts were. Some get it a bit right, but most get it a whole lot wrong.

This should not be surprising, because there are just too many variables involved in forecasting where markets are headed. No financial model can fully approximate the messy reality, which means that most forecasts are simply guesses. And because nobody on Earth has a reliable fortune-telling skill, it is a much better option to stay broadly-diversified across all asset classes and countries, and, with the help of an advisor, to determine an asset allocation that matches your own risk appetite, financial goals and circumstances.

Does this mean that you can’t express your opinion about the future? Of course not. We are all free to speculate about what might happen in the economy, markets and even the investments we are holding. The problem comes when you base your investment strategy on an opinion, even if it is made by experts in their field. Here are some examples of famous forecasts which failed miserably (and which would have cost you had you acted on the advice of these experts) :

  1. Dow 30,000 by 2008. This book was published near the height of the market just prior to the Great Financial Crisis in 2008. Click this link to see some funny reviews on Amazon.
  2. The Internet Will Not Have Any Impact on Investing. Before he got his Nobel Prize, economist Paul Krugman made this famous prediction and was quoted as saying, “As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase ‘information economy’ will sound silly.”
  3. Dow to Crash in 2013. Author and CEO of an economic research company, Harry Dent made his prediction in 2013, just before the global stock market went on to make a 27% return that year.
  4. “No chance the iPhone will get significant market share”. The then CEO of Microsoft, Steve Ballmer, commented that he wouldn’t trade 96% market share (then Windows software coverage) for the possible 4% market share that the iPhone would take. He also said that there was no way Apple could sell the device as it was too costly.
  5. Near the bottom of the 2016 market correction due to commodities in Jan, George Soros famously said that it looked like 2008 all over again. Yet 2016 ended up being a very good year for stocks.
  6. Also in 2016, George Soros lost nearly $1B betting on US stocks to crash following Donald Trump’s election. Markets instead soared following the November vote.

There are many more examples of how forecasts have failed to provide a basis for investing. However, if you still insist on relying on forecasts to guide your investment strategy, here is a list of predictions you can count on coming true for the rest of the year:

  1.  Markets will go up some of the time, and down some of the time.
  2. There will be unexpected news, and some of this news will move market prices.
  3. A lot of discussion will be conducted both in writing and in interviews on how many rate hikes there will be for the rest of the year.
  4. A lot of effort will be spent to analyse on where the stock market is going to be in the next month.
  5. Some economies will do well and others will weaken. This will change from year to year.
  6. Some companies will do well and others will not. This will change from year to year.
  7. Some portions of your portfolio will do well, and some others will not. You won’t know which.
  8. A new article or book will state that “this time, everything’s different”.

Seeing how forecasts are so fickle and hard to get right, it is better to be prepared for what can go wrong. Rather than predict whether today will rain or shine, bring an umbrella or waterproof shoes along. In investing, this means making sure your portfolio is constructed to help you ride through the worst market outcome.

Those of us who have lived long enough will know that the future is always uncertain, with unexpected events in the harsh reality of life. There may currently be signs of peace, but don’t forget that only a few months ago, everyone was fretting over a looming nuclear conflict, and peace talks were the furthest thing from anyone’s mind. Things can change as quickly or even more quickly than before. Rather than chase themes or try to invest based on predictions, do what is wise and what has stood the test of time – diversify your investments, and let the markets work for you. The only sustainable approach to uncertainty is to focus solely on what you can control.

(Some excerpts of this article were taken from “Ten Predictions to Count On” in Outside the Flags 5 (2017) by Jim Parker, Dimensional Fund Advisors.)


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GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

Here, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

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