Google “2015 predictions” and you’ll get 94 million results—23 million of which are for “2015 investment predictions.” As humans, we’re fanatical about obtaining a sense of control—which means making every effort to predict the future.
This makes the New Year the perfect time for all manner of peering into crystal balls.
But before you get sucked into the 23 million different investment predictions for 2015… you might consider remembering the following.
1. Be Wary of Forecasting
Based on the sheer number of Google results alone, clearly, ‘tis the season of forecasting. This time of the year it seems every economist, columnist and blogger is ready to tell anyone who will listen about their infallible investment predictions for 2015.
Unfortunately, humans are very poor forecasters.
In 2008, Warren Buffet wrote an op-ed for the New York Times, in which he said:
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
If one of the greatest investors ever can’t predict what will happen in the market next year, there isn’t much hope for the rest of us.
Interest rates over the last decade similarly highlight the extreme difficulty of forecasting, as illustrated in the chart below. Professional forecasters have been calling for higher interest rates for the past ten years… only to see rates fall by 50% over the period.
2. Time is Your Friend
“Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” — Nick Murray
A long time horizon (and a little patience) can be incredibly useful. It allows you to take advantage of additional opportunities and reap the benefits of compound growth—the steady accumulation of small gains, which can yield truly extraordinary results over time. A dollar earning at 7% annually for twenty years grows 3.9 times, but that same dollar over thirty years grows 7.6 times.
This concept of compound interest is especially impactful when you’re young—but can still be beneficial even for someone fifty or sixty years old. Chances are you still have a long time horizon in front of you, so don’t neglect the power of compounding.
3. The Best Time to Start is Now
“How we spend our days is, of course, how we spend our lives.” — Annie Dillard
Life is busy. There is no way around it, and this fact becomes more apparent as we age. There will always be a reason to put off thinking strategically about your financial future. But no matter how busy you get, it’s worth stopping to take stock of where you are and where you’d like to go.
As we saw with compound growth, the little choices we make today end up dictating the results we achieve—which means that every day you delay you are missing out on exponential benefits. Just as the totality of our days become the life we live, the investment actions we take today will shape our results into the future. Don’t put it off.
4. What Worked Last Year May Not Work Next Year
It’s been a great past few years for equity investors, specifically U.S. stock investors. Diversification in the form of bonds, hedge funds or commodities may seem to have been a waste.
However, what worked last year may not be what works next year. It’s important to resist the urge to chase past performance and maintain a diversified portfolio strategy, since it is nearly impossible to predict which asset class will perform best year to year. Consider the chart below, which ranks the performance of each asset class for the last ten years—and comments from Bloomberg View columnist Barry Ritholtz.
SOURCE: NOVEL INVESTOR
“What you should take away from the chart is how difficult it is to predict the best-performing asset class in any given year. To choose the right class consistently is almost impossible…For most investors, owning a broad, varied collection of asset classes is the best bet.”
5. Losses Happen
“A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.” — Wall Street Journal Author Morgan Housel
JP Morgan produced a great chart this year, depicting just how common drawdowns are from year to year. Losses of 10% or more each year are not uncommon with stocks; however, this is also a big reason why they have historically returned a premium over bonds.
SOURCE: JP Morgan
As you examine your portfolio, keep in mind that losses happen. This is an important point to remember in conjunction with # 3—time in the market is your friend, even if it may not seem like it in the short run.
So while it may be fun to read some of the enthusiastic predictions for 2015… remember these five points, and gain some perspective as you look into next year.
Interested in learning how Cordant can help you manage your portfolio in 2015? Give us a call at 503.621.9207.
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