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Our ‘Market Forecast’ for 2019

04 January 2019

It’s the time of the year again when banks, fund managers, economists and stock analysts start tripping over each other in their rush to issue their market forecast for the new year. You would no doubt have started receiving some of those by email, snail mail or read them in newspapers under headlines like “Market Outlook for 2019”.

Having read some of these, it is understandable why many are swayed by the persuasive arguments to follow various investment recommendations. But what does the evidence actually say about the accuracy of such predictions?

Bloomberg sifted through the host of predictions made by the big banks in early 2018 regarding how high the US stock market would be expected to hit by the end of the year. Now that 2018 has ended, it appears that 85% of Wall Street banks got the levels wrong!

Going further back, a bunch of PhDs and the CXO advisory group collected and studied the accuracies of market predictions made by a wide variety of financial experts – including well-known investment strategists, portfolio managers and research analysts on Wall Street. You would be surprised to learn that their average accuracy was discovered to be only around 45%. Flipping a coin would give you a better chance of success!

If the prediction accuracy rate of market experts is so bad, why do they keep doing it? Here are some possible reasons:

  1. They are paid to do this. The financial institutions they represent need to convince their clients why they should continue to do business with them and not take their money to their competitors.
  2. Humans generally have short memories, and market experts are equally adept at explaining why their predictions did not pan out – usually putting the blame on some uncontrollable external event, like trade wars or political tensions.
  3. Because of point 2, experts have probably figured out that they have little to lose and more to gain by making audacious predictions. (In 2018, predictions ranged from nuclear war with North Korea, to a Bitcoin rebound, to the perennial favourite: a market crash!) They might have realised that in the event their prediction actually comes true, they would be instantly elevated to guru status and hailed by peers and investors worldwide; If it does not, well, there’s always another year!

2019 Market Predictions

So, in the spirit of 2019 predictions, here are some forecasts for the year that we would offer you:

  1. Stock markets will go up and down.
  2. Bond yields will go up and down.
  3. Your purchasing power will be eroded by inflation.
  4. There will be political instability (or war) in some part of the world.

You will notice that these are evergreen statements. All these things will happen at some point in time. The trouble is that nobody can pinpoint exactly when that will be. Rather than fuss about with predictions, you should spend your time on preparation and planning instead.

  • Prediction: Stock markets could crash next year.
    Plan: Stock markets could crash at any time, but they will also recover over time. If you are very worried, buffer up your stock portfolio with high-quality bonds (also known as doing proper asset allocation) which can reduce the severity of any stock market crash, plus allow you the flexibility to rebalance and buy equities when prices are low.
  • Prediction: Interest rates will rise to 4%.
    Plan: Interest rates could rise or fall, so you need to have a well-diversified bond portfolio which holds both short duration and intermediate duration issues. This ensures that you do not feel the immediate brunt of rising rates from holding only high yield, long maturities.
  • Prediction: It’s time to buy now, as markets have bottomed / It’s time to sell now, as markets have peaked.
    Plan: You need to invest according to a goal you have identified. If you need $1 million to retire comfortably in 20 years’ time, why wait? You have to put that money to work. It’s the same if you have achieved a target and markets are surging; you need to sell instead of hanging on.

As you can see, investing is, much like life, filled with uncertainty. Predictions and forecasts are trying to invest with a certain future in mind, which you and I know is impossible to have.

It is much better to be well-prepared and have the right expectations of market cycles so that your investing journey will be relatively fuss-free and more peaceful. This will also help you sleep better at night, and free up your time from keeping up with irrelevant – albeit entertaining – financial forecasts.

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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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