It’s that time of year again! No, I am not referring to the Holidays which brings the hustle and bustle of gift buying, parties, and hopefully special time with family and friends. Those subjects could produce material for an interesting read, but there is another annual tradition which I have been thinking about.
I am referring to the scores of prognostications offered by many financial, investing and economic gurus. In a ritual as widely practiced as Holiday gatherings and New Year celebrations, we are hearing (or will soon hear) predictions about what 2016 “will” bring in the world of finance, including the direction and pace of economic growth, the path of interest rates, the outlook for oil prices (a hot topic!), and more!
Some of these pronouncements may sound convincing and could even be very well-reasoned. They will sometimes even come along with advice about the moves you can make to profit from those opinions or how to avoid losses. But I would caution anybody reading these missives to avoid making bold moves, no matter how compelling the prediction.
That’s because I have learned over the years to take these forecasts with a gigantic grain of salt. The business of making reliable forecasts about the sometimes arbitrary movements of the economy and financial markets is a very tough endeavor. As the late, great baseball icon and “philosopher” Yogi Berra once said, “Making predictions is difficult, especially about the future”!
That idea was recently underscored by research I have read from two prominent researchers at the International Monetary Fund (IMF), the well-known international financial organization. In a study published in May, 2014, Prakash Loungani and Hites Ahir, two IMF researchers, studied forecasters’ ability to predict recessions.
This paper, along with previous research compiled by Loungani and other economists, showed that forecasters possess a “record of failure to predict recessions” which “is virtually unblemished.” Ouch!
Does this mean you should ignore all prognostications? Not necessarily! I do read commentaries from many economists and investment experts. Understanding different perspectives about the financial world, especially when there are differing views, can be helpful. They can provide a measure of context and awareness.
But it is important to remember they may not be useful as an infallible investment or financial manual for the next 12 months. The workings of the economy and financial markets are extremely complicated and dynamic, making it extraordinarily difficult to forecast their movements, especially over a relatively short timeframe like one year.
In fact, if a forecaster says they know exactly what’s going to happen next, you might want to view such opinions, based on the aforementioned research, with skepticism. Alternatively, forecasts which acknowledge the possibilities of different outcomes might actually help inform you about unexpected developments.
Regardless of the quality of the forecast and research, I think most individuals and families may likely be much better off by placing their primary focus on having a long-term financial plan and following a disciplined process in making financial and investment decisions.
This approach might actually offer more long-term promise than placing too much emphasis on short-term forecasts which appear to be unreliable, no matter how credible the source.
To help provide context and perspective, this month’s blogs provide information about the recent interest rate hike by the Federal Reserve Bank as well as guidance about potential year-end tax moves:
As always, if you have any questions about your situation, I encourage you to email me at firstname.lastname@example.org or at (925) 464-7057.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.