Financial Astrology … it’s all in the stars

18 Mar 2014

By Jeremy Taylor

"The only function of economic forecasting is to make astrology look respectable" – John Kenneth Galbraith

I always look forward to this time of year!

Not for the wonderful weather, but for the annual ritual of financial forecasts for the year ahead.

Every year the major media outlets drag out their experts and give them the opportunity to showcase their expertise. We flock to these forecasts in the hope they will give us superior insights into the year ahead and allow us to make adjustments which may benefit our investment portfolios. 

But just how accurate are these forecasts?

Having saved one such economic forecast from last year, I thought this would be an excellent time to grade the experts. For 2013, the combined forecasts of market economists (ie, paid employees of investment banks, academics and consultants) for the Australian share market (ASX 200), interest rates and the Australian dollar on 31 December 2013 were as follows:

Consensus Forecast Actual Level
ASX 200 ​4,847 ​5,352
​Interest rates ​2.70% ​2.50%
$AUD v $US ​$1.02 ​$0.8912

As you can see, the actual results were not what was predicted, although to be fair, they did get close on the interest rates!

Having watched these forecasts for a few years now, there is a familiar pattern: the "experts" generally don't get it right. They point to "x-factors" that occurred during the year that weren't foreseeable when they made their forecasts to explain why they didn't get it right.

You would think that with such a poor record, media outlets would stop publishing these forecasts, or, more importantly, individual investors would stop paying attention to them. However, a recent Goldman Sachs survey highlighted that 32% of investors rely on investment tips from media commentators when making financial decisions (up from 25% in 2012).

This probably explains why the average investor is not getting the return they were hoping for from their portfolio. DALBAR Inc. tracks average individual investor returns versus market returns for US investors on a yearly basis. The results are stark:

Average individual investor returns vs market returns diagram 

Fixed income: The year ahead

So what are the predictions for 2014? Well the consensus forecasts for 2014 are as follows:

Consensus Forecast
ASX 200 ​5,729
​Interest Rates 2.56%
​$AUD v $US ​$0.86

We'll find out how accurate these forecasts turn out to be at the end of the year. However it's worth remembering simply investing based on what the "experts" are predicting will happen can be hazardous to your investment portfolio.

Experts experts everywhere

When it comes to your own investments it always make more sense to adopt a robust investment philosophy based on academic research with an asset allocation that is appropriate for your circumstances. This means looking at your short, medium and long-term financial goals and lifestyle aspirations. With a sound investment structure in place you really don't need to worry whether the "experts" are right or wrong.

So my prediction for 2014: North Melbourne will make the AFL top 4.....fingers crossed - I hope I'm right!

To learn more about Jeremy, view his online profile.

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