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When the famous groundhog is pulled from his burrow today to drop his meteorological insight on the waiting world, a lot of good-natured banter will follow. The assembled press corps’ live reports from Punxsutawney, PA, will be appropriately accompanied by knowing winks into the cameras. Phil’s forecast is appreciated as a bit of inconsequential fun; nobody takes it too seriously.
Unfortunately, that’s not the case on Wall Street.
Market pundits emerge at this time of year to offer their predictions for the next 12 months. Though, like Phil, they receive a lot of media attention, those prognostications are anything but frivolous and used to make financial decisions that can profoundly impact people’s lives. And that’s a problem because the unpredictable nature of the markets ensures that much of their forecast will be wrong.
They’re about as accurate as Phil.
A sampling of market calls published by Bloomberg at the beginning of last year makes the point:
- Goldman Sachs and Barclays Private Bank both forecasted global economic growth of 4.5%, a 1.6% overshot (so incorrect by about 35%), according to the World Bank’s latest assessment.
- Credit Suisse said U.S. inflation would slow to 3.9%. Annual core inflation came in at 5.7% for the 12 months ending December 2022.
- “We see another year of positive equity returns coupled with a down year for bonds,” predicted the BlackRock Investment Institute. It got the bond part right.
What you notice about these forecasts is they’re always pretty sunny, like an LA weather person’s nightly segment. And like that forecaster, they know the mudslides, earthquakes and wildfires are coming; they just can’t predict them.
Who predicted runaway inflation? Nobody. Who predicted that interest rates would rise faster than ever (and in the process, devastate the bond market)? Nobody. And who predicted the destruction of $13.5 trillion in wealth through the first three quarters of last year. Absolutely. No. One.
The consequences of relying on Wall Street prognostications while planning – and investing – for retirement can be life-changing and not in a good way. Just ask anyone who began taking cash withdrawals from a traditionally allocated portfolio last year and quickly got a lesson in sequence-of-returns risk when the market finished the year down almost 20%. No one saw that coming either.
Don’t rely on annual outlooks for financial decision-making. Retirement plans can be severely impacted when the unforeseen happens. Advice like “stay the course” – fine during accumulation – is risky for decumulating investors relying on total return when their assets may not be able to rebound from crashes. With a secure source of income in place through an annuity and/or other sources of safe income, wrong forecasts don’t devastate retirement plans and down markets are survivable.
It’s a good time of year for financial advisors to encourage clients to stop worrying about whether Wall Street’s groundhogs will see their shadow and focus instead on constructing portfolios with strategies and solutions that acknowledge the unknowability of the markets and mitigate risk instead of pretending to outsmart it.
David Lau is founder and CEO of DPL Financial Partners.
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