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Useless Predictions

Useless Predictions

June 09, 2023

"2/3 of economists forecast a recession in 2023"...

...Or at least that was the headline in Fortune magazine one year ago today in June 2022.

Then in February of this year this headline appeared in USA Today: “USA recession will start later in 2023” …it seems the economic community started to question its prior assumptions. 

Now just the other day, in CNN Business: “Case for a 2023 recession is crumbling.” 

People like to claim that the weather forecast isn’t very good – but meteorologists are oracles compared to economists. 

Investors can learn from this.  Don’t trust economic or market forecasts.  Even when almost all the so-called “experts” agree and their arguments sound so compelling – their predictions are next to worthless.  That goes both ways of course.  Today’s CNN headline predicting smooth sailing for the economy doesn’t make me feel any better (or worse) about economic prospects.  After all, with the year half over and the economy still growing at a pretty good clip, they are hardly going out on a limb with this prediction.   It’s kind of like the weather forecaster who predicted rain updating his forecast after looking outside and seeing blue sky and sunshine. 

This headline comes right on the heels of the debt ceiling resolution, which put a knife through the heart of the doomsday predictions that our feckless politicians would allow the country to default on its debt and cause economic catastrophe. 

I hate to be a broken record on this topic – but making investment decisions based on current events just doesn’t work.  Bad things will happen – that is for sure.  But no one can predict events and market movements (either up or down) reliably enough to profit from them.  

As further evidence, Morningstar just did a study in which they studied the returns of mutual fund managers who follow “tactical allocation” strategies.  These are funds which try to shift in and out of various asset classes based on market valuations or economic forecasting.  Almost none of them beat a simple, diversified, buy-and-hold asset allocation strategy.   So, if the pros who spend all day trying to read the tea leaves can’t do so – what chance do you (or I) have.  You can read about the Morningstar study here. 

The answer remains the same.  Establish a diversified portfolio which limits risk to a level that you are comfortable with – then ignore it.  “But I am retired – I can’t afford to lose money” you may argue.  That may be true – but the answer is to adjust your asset allocation to one that has less downside risk, not to jump in and out of investment markets based on the latest CNBC talking points.  

Need help setting up and managing a well-diversified portfolio based on your financial plan?  Have you been your own worst enemy when it comes to market timing decisions?  Financial Pathways can help.  We take a no-nonsense approach to investing that doesn’t try to achieve the impossible – we just do what works:  diversify, keep costs low, stick with the program, and minimize taxes.  And we can help talk you off the ledge when those “experts” try to convince you that the world is coming to an end.