Foolish Predictions Make for Dangerous Decisions

It’s nowhere near April 1st, but it seems there already are plenty of pundits making foolish predictions about what the markets have in store for us for all of 2016 – as if a few, admittedly raucous days foretell the tenor for the rest of the year.

The popular media – and, let’s face it, we readers – seem to enjoy shivering over scary market absolutes, indulging in oversized headlines like, “Dow has worst four-day start to a year on record,” accompanied by the usual images of anxious exchange traders clutching their heads in disbelief. The implication is that startling market gyrations is important news that might help us determine what is coming next, and what to do about it.

In September 2014, The Wall Street Journal columnist Jason Zweig (who is himself worth following) published a short list of “Smart People for Investors to Follow.” Robert Seawright was among those on the list. In Seawright’s recent post, “Here We Go Again: Forecasting Follies in 2016,” he provides a voice of reason as we enter what he refers to as “the Wall Street ‘silly season’ of predictions and forecasts for the New Year.”

Seawright compares Wall Street’s prediction-pundits to the Wizard of Oz, relying on flash and glitter to divert our attention from what is really going on with our investments. He provides “a veritable parade” of predictions gone bad, stretching back for decades, in case we might wonder whether poor predictive power is anything new. In a separate ThinkAdvisor post, Seawright also observes: “Moreover, when one of them [a Wall Street strategist] does get a forecast right or almost right, that performance quality is not repeated in subsequent years.”

As we’ve covered before, whether a market prediction is based on wizard’s bluster or more robust commentary, there are solid reasons to avoid trading in reaction to current events, even when they seem particularly alarming or exciting.

You’re better off treating today’s headlines as entertainment, like listening to ghost stories around the campfire. In the clear light of day, we continue to recommend investing according to the durable evidence on what makes for successful long-term outcomes. Build your globally diversified portfolio according to your personal goals and risk tolerances – your own yellow brick road – and stay on course with it through the years ahead.