Every December we get inundated with forecasts for the following year. These forecasts range from expected GDP and interest rates to stock market performance.
We are naturally attracted to forecasts because they purport to tell us what is going to happen, and they often are supported by persuasive reasoning and statistical analysis. After listening to a confident and persuasive forecast, especially if it is one we hope will come to pass, we may be inclined to make changes to our investment strategies in line with that forecast. But herein lies the mental deception. While forecasts appear to reduce future uncertainty, that is only an illusion because the markets are simply unpredictable.
Over the past 20 years, when polling economists and market strategists as a group to come up with a consensus forecast, not once did they forecast the stock market would be down the following year. Yet, we experienced six negative years. But that is not all. Experts predicted several recessions that never occurred and have been predicting a bubble for the last several years.
When it comes to forecasting the market and economy, it’s not so much about someone’s experience or knowledge. It’s about the predictability of the event. The market is impossible to predict because the future, by definition, is uncertain. Unexpected events (life happens), our responses to world events, and randomness make accurately forecasting the markets an impossible task. The proof is in the fact that no one can do it – consistently.
Using Forecasts Responsibly
Not all forecasts need be ignored. Some are better than others. Forecasts that offer a large range of potential outcomes can be helpful in setting our expectations for the future. Creating a vision of what is possible in the future is much more beneficial for our planning and decision-making than a specific forecast. Remember, the more specific the forecast, the more likely it will be wrong.
I read and review many forecasts that are published. I look forward to sharing with you in the coming weeks my thoughts along with productive expectations and perspectives to help us have a great 2022, no matter what the markets may do.
Mutual Trust Advisory Group distributes content produced by The Behavioral Finance Network. This post was written by a freelance, unaffiliated writer. All opinions represent the judgment of the author on the date of the post and are subject to change. Content should not be viewed as personalized investment advice or an an offer to buy or sell any of the securities discussed.