There is never a shortage of stock market predictions, but have any of those actually given insight into what is going to happen in any given investment market in the coming year?
We take a look at how investment market predictions from the beginning of 2021 actually turned out in this episode of Friends Talk Financial Planning and also take a look at the reliability of market predictions over time.
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TRANSCRIPT:
John: With Groundhog Day this week, there's been a lot of prognostications about the weather. But last month, there were a lot of prognostications about the future of the stock market. Have you ever wondered what happens to those market predictions? That's going to be our topic on today's episode of Friends Talk Financial Planning.
Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin. And absent today for the first time is Bridget Sullivan Mermel, my co-host. She's out on vacation this week, and she'll be back next week to join us. So, I'm excited to have a chance just to talk one on one here and show some slides and some things that I've been thinking about with regard to stock market prognostications.
Before we jump in, I just want to remind everybody to subscribe to our channel; click that subscribe button. That helps other people find us and get this word out there for some of the things that we're talking about here.
But we talked earlier in the year about what the predictions are like, how to think about the markets, and what actionable steps we can take about that. But certainly, you've all read a lot of things or seen a lot of things about what's going to happen in the markets this year. But how often do you really see something that looks back on what actually happened to those predictions? So, we're going to take a look at that for a little bit here today.
And one of the things that I follow is Barron's magazine. At the end of every year, they'll bring out and interview eight or ten or twelve different market experts to find out what they think about the markets. And these are some really smart folks. And here's an example of what they do. And it's in microscopic print here, but you can look it up yourself.
But back in December of 2020, they said, “What do we think is going to happen in the market?” And at the bottom they say, “Well, what segment should we be looking at? What are the best things that we should be doing for the next year?” And I just want to point out that these are the best and the brightest, right? These people get paid a lot of money. They are super smart. And so, you might think, “Hey, how does this stuff work out?”
And so, we took a look at what happened over the year. And we have six or eight or ten different segments. And so, from top to bottom, they were sort of neutral on energy; real estate wasn't very favored; technology many people favored; financials were the most favored. And down here, it shows what the returns were at the end of the year.
So, based on the December 2020 predictions, at the end of the year, what did it look like? And if you ignored everything and just bought the S&P 500, here's where you would have been, right? Just right in the mid-20s, you can see we had a few sectors that were above that. And then a few sectors that were below that.
And take a look. They got it right. Consumer staples and utilities, those were the least favored in the beginning of the year by the experts. Those ones did the worst. Real estate wasn't favored by many people. And that actually did really good. Energy was sort of neutral. And then you can see some of the most favored ones as well. And what I'd ask you to do is take a look at this for a minute and pick up the pattern in here.
And take a look. And if you're like me, you look at and say, “Golly, there's no pattern in there.” And this is not to say that these folks aren’t smart. I mean, again, these are the best and the brightest people out there. But take a look at what happened. It's sort of a smorgasbord, a scatter shot across the year. The point is not that, again, these people don't know what they're talking about—they’re super smart—the point is that it's really hard to predict what's going to happen. And even if you could predict it, taking advantage of it is even harder. So, we don't need to do those things.
If we stick with a balanced approach, spreading things out and diversifying, we're going to be in good shape with things. Let me show one other slide. We look back at this over the years. And all these dots show different returns and how they fared. And you don't need to be an economist or a statistics guru.
But what would happen is if the predictions were right on, all those black dots would be right around the red line. It would form a nice steady stream. And take a look at that and tell me what you see in there. And again, tell me the pattern. And if you're like me, the answer is there's no pattern in there, right?
It's one of those things that's just all over the board. So that's just a really interesting thing to take a look at. Yeah, we talk about sticking to a plan. And yes, we talk about not trying to predict the future, but come on, we're all human, right? I want to predict. I want to know what's going to happen, and what's going on with these things.
And you read things, and you think, “Jeez, what about this year? Maybe it's different.” And you look back at those slides and you say, “Well, what happened a year ago? And how did those really smart people do?” This year it was kind of so so. It wasn't terrible; it wasn't great. You look at that scatter plot and you go, “Golly. There's no pattern, there's no consistency.” And what we want to have for our investments is some reliability, and you just can't do that with those market prognostications.
I'm not sure if the Groundhog does a better job or worse job with that, but of course it's a nice, silly thing that is fun to watch and say, “Hey did he see his shadow or not? What's going to happen?” But it takes on this more serious vein when you think about it with regards to stocks, and what to do with your investments and those things and the overwhelming evidence just shows that with all those prognostications—even by really smart people, even with really good reasoning behind it—you just can't make a plan based on that. You can't take action based on that, and that's one of the things that we talk about with people on Friends Talk Financial Planning. What's actionable? What can you do to improve your life?
One of the things I guess in this episode, the first solo episode, is you can't base your investment decisions on predictions of the future regardless of how smart the people are that are making those predictions. So, have a plan, stick to it, rebalance, diversifying. And you're going to be in great shape.
So, with that I'll wrap it up here today. Again, I'm John Scherer. Bridget Sullivan Mermel will be back next week after her vacation. Both Bridget and I are members of the Alliance of Comprehensive Planners. If you like the things we talk about here on Friends Talk Financial Planning, please check out acplanner.org to find an advisor in your area. And don't forget to hit that subscribe button to help other people find us. And with that, until next time.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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