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Monday, January 10, 2011

Spending Time Readin Those Beginning of The Year Market Forecasts ? Even the Forecasters Tell You Not to Bother

A great article on market forecasts in the NYT reviewing their terrible track record, and the many reasons why it's near impossible to forecast the market. The article notes that the forecast consensus for 2008 was for a strong market. Most entertaining to me is that some of the best known names in market forecasting say that their forecasts are basically useless:

But how much credence should we place in forecasts like these?
Byron R. Wien, the veteran strategist who has been issuing market forecasts for decades and is now vice chairman at Blackstone Advisory Services, says the quick answer is this: Don’t take these forecasts too seriously, and don’t view them as the literal truth.

but my favorite quote from the article is the following:

Aaron Gurwitz, the chief investment officer at Barclays Wealth. “I don’t think market forecasts provide very useful information,” he says.
Instead, he focuses on asset allocation and on expected returns, volatility and correlations of specific asset classes over long periods. “I would really like my friends and neighbors to stop asking me whether I think the market is going up or down,” he says. “Investment strategy is the practice of decision-making under uncertainty,” he says, and it’s not wise to act as though the future is anything but uncertain.

Good advice, but even the above is difficult to do. Historic correlations are proving less and less to be useful as a guide to the future as the cross correlation of asset classes --a fancy way of saying the extent to which all classes of equities move together--- has increased over time. The past may not give much of a guide not only to forecasting market direction but also to correlations, Just another reason why investing strategy is decision making under uncertainty. Also another reason not to market time  and stock pick and  instead to have a globally diversified portfolio including stocks, bonds and commodities composed of low cos index instruments.

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