Ten Predictions to Count On

New Year is a customary time to speculate. In a digital age, when past forecasts are available online, market and media professionals find it harder to hide their blushes when their financial predictions go awry. But there are ways around that.

The ignominy that goes with making bold forecasts is seen year after year when newspapers publish polls of economists about their expectations for the economy, interest rates, currencies, commodities and shares in the coming 12 months.

Some get it a bit right. Most get it a lot wrong. And that's not really surprising because there are just so many variables involved in forecasting financial markets. No tidy model can fully approximate messy reality, which means most forecasts are just guesses.

So it should be evident by now that setting your investment course based on someone's stock picks or expectations for interest rates, the economy or currencies is not a viable way of building wealth in the long term.

Markets have a way of confounding your expectations because no-one has a reliable crystal ball. So the better option is to stay broadly diversified and, with the help of an advisor, set an asset allocation that matches your own risk appetite, goals and circumstances.

Of course, this doesn't mean you can't express an opinion about the future.

We are all free to speculate about what might happen in the economy and markets. The danger is when you base your investment strategy on an opinion.

In the meantime, if you insist on setting store by forecasts, here is a list of ten predictions you can count on coming true in the coming year:

1. Markets will go up some of the time and down some of the time.
2. There will be unexpected news. Some of this will move prices.
3. Acres of newsprint will be devoted to the likely path of interest rates.
4. Acres more will speculate on politics and personalities.
5. TV pundits will frequently and loudly debate short-term market direction.
6. Some economies will strengthen. Others will weaken. These change year to year.
7. Some companies will prosper. Others will falter. These change year to year.
8. Parts of your portfolio will do better than other parts. We don't know which.
9. A new book will say the rules no longer work and everything has changed.
10. Another new book will say nothing has really changed and the old rules still apply.

You can see from that list that if forecasts are so hard to get right, you are better off keeping them as generic as possible. Like a weather forecaster predicting wind, hail, heat and cold over a single day, your audience will prepare themselves for all climates.

The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better. The only sustainable approach to that uncertainty is to focus on what you can control.

It's like when you go to the beach. There is the risk of getting sunburnt, having your stuff stolen or getting caught in a riptide. But you can deal with those by slipping on a hat, a shirt and sunscreen, leaving your valuables in the car and not swimming outside the flags.

And that's where we came in.

Article by Jim Parker - Dimensional Fund Advisors

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.