This Forecasting Season, Channel Your Inner Grinch

12/29/17

I enjoy the holiday season, I really do. But around this time of year, I start to channel my inner Grinch, or more specifically, one of his infamous quotes: “There’s one thing I hate – all the noise, noise, noise, noise!”

The volume of information and opinions swirling around the financial markets is deafening year-round, but it seems like the period between Thanksgiving and New Year’s is always especially chaotic.

First, there’s the annual tradition of strategists at all the major financial firms — BofA Merrill, Barclays, Citi, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, UBS — dutifully rolling out their forecasts for the coming year, and all the financial media outlets dutifully covering the “story.”  Most of the parties involved know the forecasts are almost always wrong and add no more value for investors than the Whos blowing their Who-whoobas, banging their gar-ginkas, and slamming their sloo-slunkers.

Take last year, for example. Out of 16 forecasts heralded by Yahoo Finance at the end of 2016, the closest one undershot the S&P’s return (based on the Dec. 22 close) by 7%, while the farthest was more than 15% off. This is not an unusual occurrence, and industry observers like Barry Ritholtz have written for years about the folly of forecasting. In a recent white paper, Morgan Housel put it this way:

Think about market forecasts. Evidence that they have any actual predictive ability is hilariously bad. I once showed that if you just assume that the market goes up every year by its historic average, your error rate is lower than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street institutions. Predicting recessions isn’t much better. And since big events come out of nowhere, forecasts may do more harm than good, giving the illusion of predictability in a world where unforeseen events control most outcomes.

The year 2008 is a perfect example. The most bearish Wall Street forecast made at the end of 2007 was Morgan Stanley’s call for the S&P to finish 3.5% higher, while the index actually fell 37% in 2008. When it comes to predicting the future, no one knows what they’re talking about.

Speaking of things everyone is talking about but no one understands, cryptocurrencies are far and away the noise du jour.  Financial and social media are awash with breathless reports of Bitcoin’s 30% rise or 20% fall for the day, and in a trend reminiscent of the dot-com craze, anything remotely related to blockchain immediately receives a premium valuation.  Just recently, the beverage maker Long Island Iced Tea Co. (LTEA) changed its name to Long Blockchain Corp. under the pretext that it’s “in the preliminary stages of evaluating specific opportunities involving blockchain technology,” and the next morning the stock jumped almost 300%, closing almost 200% higher for the day.

For those of us watching from the outside, it’s easy to feel like everyone is getting rich and we’re missing out. The reality is that, except perhaps for tech entrepreneurs who live and work in the world of cryptocurrencies, buying Bitcoin or Ethereum is pure speculation, not investing. That’s not to say blockchain technology doesn’t have the potential to be revolutionary, but for the average investor, following the price of Bitcoin or the latest ICO is completely irrelevant to achieving their goals.

Even for an experienced advisor, the barrage of financial noise (and don’t get me started on political noise!) makes it hard to stay focused on what’s most important: helping your clients get from where they are today to where they want to be financially.

One of the best things you can do for your clients as an advisor is to channel your own inner Grinch. No, not by trying to squelch their Christmas spirit, but by helping them develop an aversion to noise in their own financial lives. Educate them on the psychological, physical, and financial benefits of turning off CNBC, deleting the stock quotes app from their phones, and ideally not checking their portfolio balance more than once a quarter.

Most of our irrational financial decisions are motivated by either fear of loss or fear of missing out, and today’s 24/7 barrage of financial media coverage is intentionally designed to feed and exaggerate those fears. The less noise your clients subject themselves to, the less they’ll be tempted to abandon the disciplined investment path you’ve helped set them on and to buy into sensational and emotionally compelling, but ultimately harmful, narratives. Here’s to a prosperous and noise-free 2018!

 

Reprinted with permission from the December 28, 2017 issue of ThinkAdvisor. ©2017 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.