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Sure Things! Probably Not.

Investments Insights

The stock and bond markets are always looking ahead.  Unfortunately, we are terrible at predicting the future – especially in the financial world – and the talking heads on TV are no better.  Few things show this more clearly than Larry Swedroe’s annual list of “Sure Things”.  At the beginning of each year, Larry puts together a list of financial predictions that everyone knows are going to happen over the course of the year.  As the year ends, he tallies up the number that transpired.

At the beginning of 2017, we all knew that:

  • interest rates will rise, and investors should limit their bond holdings to the shortest maturities
  • the inflation rate will rise significantly
  • the growth rate of real GNP will accelerate, hitting 2.2%
  • the dollar will strengthen
  • emerging markets should be avoided
  • domestic stocks are overvalued and will have mediocre returns
  • U.S. small-cap stocks will underperform against U.S. large-cap stocks
  • international developed-market stocks will underperform against U.S. stocks

How many of these came to pass?  ONLY TWO.  That’s only 25% correct.  That’s a solid F.

This is not an anomaly.  Here are the scores for the last seven years:

YearNumber of Sure ThingsNumber That Actually HapenedPercent Correct
20178225%
20168225%
20158338%
201410330%
20137229%
20128338%
20118113%
20105120%
TOTALS621727%

source: Larry Swedroe, BAM Alliance

Remember, these are sure things.  These are the predictions that most people count on for making adjustments to their investments.  Yet… only 27% actually came to pass.  These predictions cannot be helping!

What if you found someone who had a 75% prediction rate?  Congratulations!  Unfortunately, this is just the first step.  Now, we have to correctly predict how the world will react to the event to be able to profit from this news.  This is another tall order.  Let me give some recent examples:

  • Knowing that short-term interest rates would rise in 2017 would have led investors to buy short-term bonds – bad advice as longer-term bonds outperformed.
  • Knowing that Donald Trump was going to become President would have led most people to abandon the stock market – bad advice as the stock markets have had an outstanding run since he took office.
  • Knowing that the global financial crisis was coming would have led investors to buy international stocks and commodities – bad advice as these dropped in value even more than domestic stocks.

I hope this information is helpful next time you see one of the financial gurus on TV and are tempted to make major moves with your investments.  Historically, we’re better off doing the opposite.