Investment experts are no better at predicting the future at the start of the year and financial planners should think carefully before acting on the latest round of predictions for economies and markets.
This is the view of van Eyk head of strategic research, Jonathan Ramsay, who says while crystal-ball gazing is popular at this time of year, planners and their clients need not take this as a sign that predictions should be acted on or that they were any more relevant than predictions made at other times.
“There’s no inherent reason why the experts should be better at predicting the future now than they are at any other time of the year,” Ramsay said. “One needs to be careful that someone’s holiday reading isn’t allowed to set the agenda for the rest of the year.”
He added that it was an interesting exercise to look at which experts and commentators made their predictions from previous years readily accessible so their record could be judged and which ones appeared to “wipe the slate clean”.
“Those who are prepared to raise last year’s predictions and discuss how close they came to reality and why they should be treated with more credibility,” Ramsay said.
Despite these reservations, he believes attempting to predict the future and identifying which themes will shape markets in 2013 could be a useful exercise because it forced analysts to refocus their views.
The results could also be beneficial to financial advisers and their clients as long as they understood how to use them properly.
Oh, all right then. I’ll have a go
Ramsay offered these tips:
Try to avoid clutching at opinions that will make you feel good about the performance of your investments last year. “With so many views flying around, there is something to suit everybody’s prejudices,” he said.
Don’t overemphasise the link between investment themes and asset class returns. “While it’s easier to talk to clients about big, tangible market themes, they do not necessarily translate into market performance,” he said. Furthermore, many of the most prominent themes will be well known and already priced into markets.
Themes and predictions need to be assessed in terms of the probability that they will be correct and what would happen to an investment portfolio if they are not. “It’s important to assess what would happen to your investments if the future doesn’t pan out as you thought it would and look at which scenarios have the biggest impact on returns,’’ Ramsay said.
