Monday, January 30, 2012

Long-Term Predictions Sure To Go Wrong

    We are concluding a month that famously provides predictions sure to go wrong.  Financial publications depend upon sensationalism to sell their product, and the best way to bring in new subscribers is with claims to have some type of superior knowledge you can benefit from.  The problem is they have no such knowledge.  Since nobody seems to be held accountable it is easy for new suckers to be born every year.
    I am not against analysis and strategic investing.  What I am against is the audacity of some who feel they can accurately tell you what the best stocks are for the next decade, or which mutual funds will be the best ones to own for the future.  Look at the way the markets move and ask yourself if you think such long-term predictions can be done accurately.
    Every year Smart Money and Money Magazine release their 100 Best Mutual Funds lists.  I challenge you to try to find a link online (that actually works) that will show you one of their lists from the past.  It’s impossible.  I had to go to the library to look at the archives.  With the lack of success their list has historically had, I can see why every link online fails.  The readers of these lists resemble a revolving door.  New readers come in, get burned never to return, meanwhile a whole new crop of “pie in the sky” readers are continuously coming through the door.  Stop!
    In the August 2000 issue of Fortune Magazine they listed the “10 Stocks to Last the Decade”.  Of the 10 stocks listed, two are no longer in business, seven finished the decade down, and only one finished the decade higher.  This lack of success was not specific to Fortune.  I could have pointed out hundreds of so-called “expert” predictions for the same period of time that had done just as bad, and many were worse.  We do not know what is going to happen in the world next week, next year or in the next decade.  If I had told investors in January 2000 to raise their hands if they thought the S&P 500 index would end the decade down, how many hands do you think would have been raised?  Yet that is exactly what happened.
    I strongly encourage you to ignore the sensationalism.  Whether the markets are skyrocketing or whether they are in free fall, there is always someone out there trying to take advantage of the emotions individual investors are most likely feeling at the time.  For example, consider the body of work from Harry S. Dent, Jr.  When I got into the business (many years ago) his book “The Great Boom Ahead” was all the rage.  Financial advisors, throughout the 1990’s, would host seminars luring in new clients purely based upon this book.  That book was soon followed by his book “The Roaring 2000’s”.  This was perfect timing to coincide with investors emotions at an all-time high as they chased the internet bubble.  Well it seems the 2000’s weren’t as “roaring” as Harry predicted.  Not to worry because his latest book “The Great Depression Ahead”, released in 2009, will surely put Harry back on track.  His books seem to be geared towards selling the market what it wants to hear at the time.  Individual investors buy this garbage.  I guess if I really wanted to make sure my book sold well then I would have come up with a crystal ball type of title.   
    You would be much better off ignoring all of the “expert” opinions.  There are many reasons for this and here are a few: 1) The expert might be wrong, 2) You will rarely know when the expert has changed his/her opinion, and 3) The common sense you possess far outweighs expert opinions that probably do not pertain to you.  The experts telling you what you should invest in have no idea how long you have to invest or what investment experience you may or may not possess.
    I personally know and follow hundreds of wonderful strategist doing great work.  The sad thing is they are automatically discredited by financial advisors at the major firms.  The same advisors who cling to the long-term unpredictable work that the firms they represent produce.  What is wrong with considering opinions from experts focusing on how to try and make money today?  These people are experts in technical and securities analysis, which is something the majority of financial advisors, who dismiss these experts, have no training.  I have much more respect for those trying to work in the moment rather than trying to position themselves for ten years down the road.
    In the end it is up to you, the individual investor, to make the decision to stop investing in sensationalism.  If you choose to educate yourself, and consider the source, then you can stop being a part of the majority who likes to be spoon fed.  If enough of us stop buying this product then the old guard will stop rolling out the money to produce their sensationalized views.
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success