The Folly of Forecasting

 

As we enter a new year, plenty of media outlets will publish stock market forecasts from various market analysts. These forecasts will make bold predictions about where stocks, bonds, and the economy are headed in 2024. However, before you put any stock in these forecasts, let’s explore why we find them so tempting in the first place.

Our Brains Crave Predictability

Before explaining why we believe that market predictions are futile, it’s essential to understand why human beings are so attracted to these forecasts in the first place. Psychologists tell us that we have an innate preference for certainty over uncertainty. When facing an unpredictable future, we crave clarity, assurances, and some sense of control, even if it is an illusion.

Making predictions, even inaccurate ones, helps satisfy our brain’s desire for order and our inability to accept events as random. Having some story of what the future may hold makes us feel safer and less anxious. Of course, the realities of the complex world mean many things cannot be predicted accurately.

Nonetheless, pundits who boldly predict detailed market outcomes will always have an audience because of how our brains are wired. Admitting the future is ultimately unpredictable is unsatisfying. This is why the temptation to listen to market forecasts remains despite their terrible track record.

A Dismal Record

The fact that previous forecasts have widely missed the mark should give us further reason to pause. A year ago, many experts forecast a year of negative returns for global markets in 2023. We now know that many international markets experienced a year of high returns.

The difficulty to predict short-term returns should not surprise us. Economies and markets function as “complex adaptive systems”. With so many variables interacting, predictions are difficult and black swan events are inevitable. Rather than get distracted by narratives offering false certainty, we are better off accepting uncertainty and controlling what we can control.

As Warren Buffett wisely stated, “Forecasts usually tell us more about the forecaster than of the future.” In other words, the market predictions you hear are more useful for assessing the ego and attention-seeking motives of the pundits rather than divining anything about next year’s economy or market.

We suggest ignoring the predictions. However, should your brain still be tempted to latch onto this year’s forecasts, we encourage you to remember that:

  1. No one knows what significant events will occur this year. The world is inherently unpredictable, as we’ve learned repeatedly. Even the most knowledgeable experts cannot reliably forecast political events, natural disasters, technological breakthroughs, or other surprises that can impact markets.
  2. Even if pundits could predict major world events, no one can know precisely how irrational, emotional human beings will react. Markets are driven by fear, greed, and crowd psychology more than facts.

Navigating a Complex World

As your advisers, we want to reassure you that we will never change your investment portfolio or long-term strategy based solely on market predictions or forecasts. We develop comprehensive plans tailored to your specific financial goals and ability to weather short-term declines rather than react to short-term noise. We only recommend adjustments when your circumstances or priorities shift, not when a pundit makes another faulty guess about next year’s market.

While we acknowledge the natural curiosity about market forecasts, we continue to focus on what has proven most effective: a solid, evidence-based investment strategy tied to the steady progress of human innovation and resilience. Despite inevitable fluctuations, the trajectory of progress and prosperity endures. As we navigate 2024 together, our commitment remains steadfast—to adapt and refine your financial plan to meet evolving needs, goals, and aspirations, ensuring it remains robust no matter what the headline of the day might claim.

We invite you to reach out anytime to discuss your plan and reaffirm our shared commitment to a strategy transcending the yearly cycle of predictions and speculations. Here’s to a year of remaining focused on what matters most on your financial journey.