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The Value Of Market Predictions

By: Frank Armstrong

By: Frank Armstrong, CFP, AIF

I confess. I’m a news junky. My day starts by browsing CNN, CNNfn, AP, MSNBC, Wall Street Journal, New York Times, Miami Herald, and Washington Post before coffee. Of course, given my profession, I pay particular attention to the financial news.

On the morning of September 24, I found myself clicking away around the net before the sun was even up. Frankly, I was looking for a little good news. Events of the previous two weeks had been horrible beyond my wildest imagination. America and the world were just coming to grips with a devastating blow. Financial markets worldwide reacted with one of their worst weekly performances on record. Every single market had fallen sharply. Futures were down sharply. To paraphrase a popular advertising slogan: It don’t get much worse than this!

Unfortunately, market predictions are almost always folded in with legitimate financial news. The media is unable to help themselves. First they report the news. Good. Then they report predictions. Not good! Placing predictions side by side with real news gives them an unfortunate credibility.

Last Monday was no exception. The previous week’s market swoon was accurately depicted, followed by dire predictions. Every single source forecast a further miserable market week. Go back and try to find a solitary optimistic market forecast for last week. I couldn’t find one.

Now, of course, the results are in. Last week produced one of the strongest global market performances on record.

So, you ask: “What is the value of all these predictions?” The answer: Far less than zero! Combine these useless predictions with a highly charged emotional atmosphere, and you are set up for making truly unfortunate decisions. Fear driven market timing decisions rarely work out. Had you acted on Monday morning’s doom and gloom prognostications, you would have missed one of the strongest rallies ever.

The lesson is obvious. Ignore market forecasts. If we could make useful tactical (market timing) decisions based on what we read in the papers, we would all be rich. None of the commentators have even a tiny little clue. Yeah, they wear nice suits, and they talk a good game. But, you might as well get market advice from your parrot!

In the complete absence of valuable predictions, stick to the basics. Have an asset allocation plan that meets your unique needs. Diversify widely. Control costs and taxes. Keep focused on your goals. Invest for the long haul. Ignore the random market fluctuations along the way. Don’t panic, and don’t make emotional decisions. Remember, doing something is always easy. Doing the right thing takes careful thought, discipline and sometimes courage.