The Limitations of Stock Market Forecasting

Now that February is here (finally for those of us in the Midwest!), we are at the tail end of what we call at Cambridge the “the prediction season”. Typically, towards the end of each year and the beginning of the next, many so called “market experts” like to forecast how markets will behave the coming year. I’m sure by now you have come across articles, interviews or videos with topics such as: 2019 stock market outlook,or 5 bold picks for the stock market in 2019. I certainly know that I have. The problem that we see with these predictions is for most people they are very enticing. Sure, who wouldn’t want to know how 2019 is going to play out? Perhaps if you knew ahead of time, you could adjust your actions to accommodate these forecasts. It is a compelling thought, right? The issue is, in most instances, most forecasts are totally wrong. Unfortunately, no one knows exactly what is going to happen or what stock will be the next big winner, or loser for that matter.  

To us, rather to trying to predict an outcome like what stock to buy or whether stocks will be positive or negative, it is important to focus on what you can reasonably predict, such as: what are your financial goals and what resources do you have now (or expect to have in the future) to accomplish them. These are just a few of the important financial planning questions that you should be asking yourself when thinking about your own forecasting.  

To help illustrate this point, below is a link to a short video that I think hits the nail right on the head as it relates to the limitation of stock market forecasting. In this video you will see the Founder of Dimensional Fund Advisors, a research-based asset management firm, describe the problem with the media forecasting ”noise” as he calls it. The video is short and I think well worth your time. Part of our job is to help communicate topics that we think are relevant to the financial planning process. We think tuning out the noise and focusing on your specific goals and resources should be towards the top of anyone’s financial planning to-do list. Unfortunately, a sensible topic like that does not get as much traction as headliners like: how to avoid the coming 2019 market collapse. It is just the world we live in. Happy planning!