Forecasting Folly

Source: Blackrock

With interest rates, oil prices, and market values jumping around, it’s tempting to believe that the people being interviewed on television know exactly where things go from here.  Today I just want to remind you that experts, especially those in the business of making economic and market predictions, are usually wrong. 

To highlight this point, below is one of my favorite charts:

The best part is the blurry blurb about the source data at the bottom which reads:

The median forecast for the direction of the 10 year US Treasury Bond was correct 13 of 29 years.  “Wall Street experts” refers to the 40+ financial professionals and professors surveyed by the Federal Reserve Bank of Philadelphia.

In other words, these are not random folks answering an internet survey.  These are the professionals being asked for guidance by the Federal Reserve.  And yet, they are collectively wrong more often than they are right on the 50/50 question of whether an interest rate will go up or down.

Keep this in mind when someone starts a conversation by saying, “The experts think that [abc stock or commodity] is going to [xyz price].”

When it comes to investing, the experts never all agree.  That’s why we never rely on strategies where the success or failure is entirely dependent on a specific outcome.  Instead, we assume all outcomes are possible and stress test the allocations accordingly. 

Successful investing doesn’t require a crystal ball. It simply requires allocating such that you are positioned to benefit from the most likely scenarios, while still being able to accomplish your most important financial planning goals should things go differently.