It’s that time of year. The forecasters are out. They’re on CNBC, they’re on Fox. You got DJs, CFAs, DFA, Kiplinger, Bloomberg, Capital Group, JP Morgan, Morningstar, Forbes, you name it, you got a forecast.
Let’s take a look at 2023. The S and P finished at 4,769.83, up 24%. The Nasdaq was up 44.7% (!!!!). The bond market was up 5.4%. As historically bad as 2022 was, 2023 was the opposite.
Now that the future is past, let’s look into the future that was forecasted for 2023.
Dancing Madly Backwards
In September, 2023, Marketwatch published an update of various forecasts, which documented a high forecast of 4,750 (Fundstrat) and a low of 3,400 (BNP Paribas). The average? 4,167. Three quarters of the year was complete at this point. The actual performance difference from the average was 602 points. The average September forecast missed the year-end actual by 12.6%.
Fortune’ summary is “Stocks fool nearly everyone”.
Goldman Sachs called for 2023 to be flat. If you went to bonds, and captured all of the year’s 5.37% Global Aggregate Index, you missed out, big time. By the way, the 60-40 was definitely defiantly not dead this year (PS: It never will be). A 60-40 weighted average of the iShares Core US Aggregate Bond ETF and iShares Russell 3000 ETF amounted to investment performance of 17.41%1.
So, Fundstrat. Luck? Skill? Their 2022 forecast was an 11% increase in the S&P. Actual result? The worst performance since 2008, down 20%. That 31% delta, if you went all in on equities in 2022, was… painful. 2023 would have helped, of course, but you would still be underwater right now by about .8% (eight-tenths of one percent) assuming you achieved index performance. OK, what about 2021? Fundstrat forecasted a 21% gain.
The math here is a 28.8% gain. That’s a 37% relative difference and 7.8% in actual performance.
One out of three? A small sample size, for sure. But I’ve seen enough of this to be pretty certain that this is likely to repeat itself, and 33% accuracy is probably extremely high. We are highly likely to find this same result across all of the forecasters.
Welcome to the forecasting swamp.
Is It In My Head?
Realistically, if someone could consistently get this correct, they either wouldn’t tell us and would be crushing the rest of us with their returns or they’d sell their model for a gazillion dollars. And if everyone used it, then no one would make any money. I’m betting that our collection actions in using the forecast would alter the results. Hello, Schrodinger.
Yet we see these forecasters all over the place, and they are collectively, consistently wrong by wide margins, and they are highly paid and all over the financial news.
The problem is in our heads. We want certainty. We want to justify our decisions, to know we made them sensibly, backed by reason. But that’s neither the way most of us do things nor how our brains work.
We make decisions and then find justification. We take recent events and extrapolate them into the future. We imagine things as we wish them to be, and then we (overconfidently) assume it will be so. And this works the same way for the doomers/permabears and boomers/permabulls. That being said, the permabulls are much more probabilistically correct. It won’t take you more than 1/10 of second to visually process that positive return years far outweigh negative years. If you want to count, there are 127 years represented here. Thirty-two of them are negative. That’s 25%. Which means 75% are positive. Three times more positive than negative years.
Sadly, this runs into conflict with our fight or flight mechanism. We instinctively don’t like negatives. As much as we would like to, we cannot predict negative markets (or positive ones, for that matter). Many have tried. No one has succeeded. As a result, your brain can, and often does, get negative. And whether your brain is negative or positive, it often drives deleterious, physical reactions when dealing with money.
“Under stress, blood flow and electrical activity are reduced in the frontal and prefrontal lobes and increased in the survival parts of the brain, such as the amygdala,” Daramus said. Since these parts of the brain help with skills such as problem-solving, concentration, planning and impulse control, the reduced functioning in those areas can lead to poor decision-making.
When you’re worried or panicked about your financial situation, your decisions become more impulsive and driven by survival. “We act quickly and decisively, but not always as accurately as usual,” Daramus said.”
If you let your brain do its thing, it could care less about facts or reasoning or logic. It will make its decision and then justify that decision. This is the reality of human decisions and why, if you want to be a great investor, you must focus on the behavioral aspect of financial decisions.
Not surprisingly, the forecasters are on the happy trail right now. Here’s an article from the Wall Street Journal, published 1/5/2024.
Most investors are expecting the good times to continue.
A survey conducted in December by BofA Securities found that fund managers were more optimistic than in any month since January 2022, which coincides with the S&P 500’s last all-time high. The group is collectively the most bullish on stocks since February 2022.
Confusing? Difficult? Frustrating? Yes.
By-tor and the Snow-dog
Can you win this battle? You can. Let’s first discuss your expectations - how do you preset your mind?
The worst thing that can happen is a 50% drop, which has happened exactly once (a .78% occurrence) and from which you will recover if you stay invested. As with anything, there is no guarantee. I can say that we have always recovered, so far. Can it happen again? Of course it can. Is it probable? No.
You should expect, on average, that three of every four years will be positive. Seventy-six of those one-hundred-twenty-seven years had performance between 10% and 30%. That’s 60% of the years. Add the thirteen years where performance was between zero and minus ten percent, and you now cover 68% of the years. There have been twenty years with performance equal to or greater than 40%.
Regarding specific actions, I advocate and practice the following:
Ignore the news and forecasters. “Pay no attention to the man behind the curtain”.
Maintain a current and realistic financial plan with ranges of success.
Establish separate accounts for unique goals and establish a strategy for each.
Evaluate your investing strategy annually.
This is when you look at your balances and determine if you are achieving your plan.
The biggest drivers of your strategy should be your time horizon and tolerance for volatility, and these may be different for different goals (hence separate accounts).
Save first and spend the remainder, which ensures that you spend less than you make.
Systematically save - every time you receive compensation.
Automate your saving.
Maintain an income reserve sufficient to prevent a need for portfolio withdrawals for at least 2-5 years, depending on your strategy.
Stay invested and never interrupt compounding. When you, inevitably, get negative, read some market history. Give it 24 hours. Then think about the decision you are considering.
“Gee Mark. I have read several of your pieces. You keep beating this dead horse.” Guilty as charged, with a caveat. I am completely guilty of repeating a set of themes, actions, and facts. 100% . Proud of it. Because The Horse Is Not Dead. Forecasters remain. People keep following them. Investors behaving badly is a continuous event. And yet The Forecasters’ Hall of Fame Has Zero Members.
Thanks for reading.
Sundry:
I love Bob Seawright’s Forecasting Follies. You will, too, I bet. I know he’s working on the 2023 update.
I finished Race and Reunion. It covers the period from 1865 through 1915, focused exclusively on the issues and narratives surrounding reunifying our country. I find this quite applicable to where we are today.
Ycharts Weekly Market Monitor 1/2/2024