January is a month of fresh starts, resolutions and, in the finance world, predictions about what investors should expect in the coming 12 months.
With the beginning of a new year, financial media is awash with the prophecies of the world’s top strategists, economists and portfolio managers prognosticating on the future direction of stock and bond markets.
These predictions are highly sought after. It’s human nature to seek the opinions of experts when making important decisions.
And where financial decisions like where to invest hard-earned money are concerned, where better to go than Any Top Strategist at XYZ Fund Manager?
It’s easier than ever to hear from the industry’s leading minds and make portfolio decisions, as financial media channels complete the loop between expert and investor.
This would be a reliable and repeatable way to capitalise on rising markets and avoid falling ones if such predictions were consistently accurate.
However, 2023 was a prime example of the folly of forecasting. A year ago financial media reported a bleak consensus for 2023, with the average forecast predicting a negative year ahead.
Forecast v reality
Any investor reading that would have been understandably drawn to the relative safety of cash deposits to avoid falling markets.
Yet, fast forward to the end of December, and most major stock and bond markets ended the year in positive territory.
The FTSE 100, which is an index of the UK’s largest 100 companies, ended 2023 up 3.8%, while the US stock market – as represented by the S&P 500 – saw nearly 25% growth.
Investors who moved to cash a year ago missed out on these returns.
And last year was by no means an isolated “own goal” from forecasters. Most fail to accurately predict even the direction of markets, let alone which markets will generate the best investment returns.
For those that do get it right, it’s almost invariably as a result of luck rather than skill.
Opinions usually differ greatly, making it even harder for investors to know who to believe and what to do.
Rather than trying to second guess markets, harness the powerful returns that go hand-in-hand with embracing them.”
But the good news is you don’t need to be able to predict the future to have a good investment experience.
Stock and bond markets have historically rewarded investors over the long-term, providing growth in excess of that available on cash deposits and, importantly, inflation.
While returns from one year to the next are a random walk, markets go up more than they go down. Rather than trying to second guess markets, harness the powerful returns that go hand-in-hand with embracing them.
Accepting market returns is not second best to beating the market. An investor’s fascination with beating what is already good will often lead to sub-optimal results.
Market returns won’t be positive every year, but they are positive more than they are negative. There’s no surefire way to predicting when good and bad returns will show up.
The most successful method of capturing good returns when they show up to is stay disciplined whenver they are negative and stay invested. The good times always return and the patient are rewarded.
Liam Kerr is a director in the Aberdeen office of Carbon Financial Partners.