The new year is fraught with futile forecasts

As a new year begins, we will see another whole new set of resolutions being made. Alcohol and cigarette sales drop and new gym memberships spike 50% as people put those new year’s resolutions to work.  There is also another common feature. We see a deluge of forecasts and predictions pouring out of the financial media and the mouths of  the “experts”.

Investment strategists all over the world perform their annual practice of predicting where the market will go in the upcoming year. Full of confidence and bravado, they forecast whether it will go up or down, and where it will end up – the forecasts are endless. 

Memories are short and there is naturally little mention of the nearly universal failure of the past to be able to predict with any precision. Little surprise that none of the strategists look back at their past forecasts as another year passes and another forecast is paraded out. It is a strange annual ritual that many people still follow and spend time on. Clearly human beings are not known for having the ability to predict the future. We don’t even know how long our new year’s resolutions will last. We often cannot control our own behaviour let alone predict the behaviour of tens of millions of participants in financial markets.  

The bull in a bear market

In 2023, no one predicted the stock markets would rebound so strongly from the devastating falls in 2022. In fact, the US and global markets were up more than 20% which by any definition is a bull market! The unprecedented disruptions in bond markets with rapidly rising interest rates throughout the year led us to believe that we could have an unprecedented third year of losses in the bond market and it was the case until November. The market rallied hard to finish the year in positive territory and looking back the bottom of the bond markets was October of 2022, around the same time the stock market bottomed. The MSCI ACWI ended the year up 20%, S&P 500 Index was up 26% and the Nasdaq was up 55%. 

It’s safe to say that short-term predictions are fairly worthless, and paying attention to forecasts is a wasted effort. As economist John Galbraith once put it: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With a healthy dose of humility, we need to admit that we all have little clue of where the markets will go over the next year. 

Science over speculation

Most of the time, strategists will just forecast a high single-digit return in any given year. This is because global stock markets have averaged 8~9% returns annualised. So these forecasts seem to make sense at first glance. But this prediction is clearly meaningless if every single year the actual return is significantly higher than predicted or deeply negative. Returns have fallen outside the range every single year and are never at the long-term average. 

What this means is that any short-term price movements of 1, 3, or even 5 years are merely noise for the long-term investor. If you believe in the long-term economic progress of the world and realise that the equity markets are the selection of the best companies in the biggest economies, then you should understand that the market movements are actually noise (or short term volatility to ride out). This year is a perfect example of how there has been much ado about nothing. It’s better to remain invested through cycles believing in the power of markets to generate average returns over the long term than try to beat the market every year not knowing where you are headed. 

While we thought that a post-COVID world would return to normal, what we have experienced so far suggests that we are never returning to that world of zero interest rates and stable prices and geopolitics. The unpredictability has risen generally, which probably means that people who make a living making forecasts are more likely to be even more wrong than right. Even more than before. 

Slow and steady wins the race

We should all remove the charlatans of finance, who make bold but mostly wrong predictions about the future, from our reading and podcast list. And instead, focus on what matters and what works based on the science of investing and wealth, such as the power of markets and compounding, the benefits of diversification, and the importance of asset allocation.    

We know we cannot predict the markets, but we can raise the probability of success if we focus on long-term returns. The power of compounding and time will do the bulk of the heavy lifting without much effort on our part if we can remain patient with our money. Endowus’ desire to make investing easier so we can live easier today and better tomorrow is fitting here. 

Long term success can still be achieved without the hustle and bustle of daily stock trading or panic-driven activities in falling or rising markets. It is common knowledge that too much activity (and also too much choice) leads to poorer outcomes. The historic events of pandemic and war in the past few years have taught us that money isn’t everything and there are more important things in life - like health and family. But building wealth in the right way helps us tide through some difficult bumps along the way and it allows us to pursue the more important things in life. 

We also must remove the idea that “safe is good” or “cash is king” when it comes to investing our money. If we take anything away from the recent cycle, we should learn that interest rates and inflation always go hand in hand. Even with higher interest rates for our fixed deposits and T bills, we saw inflation running higher than that. This meant that our purchasing power was eroded even at 3-4% or higher interest rates as inflation was higher than that.

If we had remained in markets for the recent several years the effect of compounded annual returns means that at the end of 2023, you would have enjoyed the tailwind of the markets showing positive returns in four of the past five years. The effect of compounding market returns as compared to fixed deposits is clear in the chart above. This is true for all your long term investments but especially for CPF and SRS monies. 

Review your new year resolutions

This year let go of what we cannot control - the market direction, the economy, or what will happen to war and pandemics - but on the only thing actually within our control: our behaviour. When you are making those new year’s resolutions about your physical health - to give up smoking and alcohol, or to exercise more and eat less, don’t forget to work on your financial health as well. 

New year’s resolutions on investing at the start of the year also see a spike. However, this should be easier to sustain than going to the gym every week if we keep it simple by setting up some regular savings and investment plans. Developing ongoing good investing habits may be the most important thing we can do this year and the only certain way to better prepare for a future that will always be uncertain.