Forecasting the Financial Future

Come January, I traditionally mock the Financial Journalist’s annual requests for forecasts of the year ahead by Financial Advisors.

There are many suitable responses to this annual charade, some of my personal favourites include:

“Pundits forecast, not because they know, but because they are asked” – JK Galbraith.

“It is difficult to make predictions, especially about the future” – Yogi Berra.

“Wall Street’s favourite scam is pretending luck is skill” – Ronald Ross.

And finally, when asked in the Wall Street Journal in October 1922 about the prospects for the market, Henry Poor of S&P fame said; “I believe it will fluctuate”.

Our Investment Philosophy

Our Investment Philosophy is based on academic research, not our hunches or personal opinions, and is best described as ‘evidence-based investing’.

As an investor you do not need a Guru to forecast the future to have a successful investment experience.

Over time (and I mean decades here), despite the constant steam of bad news, markets have consistently rewarded investors simply for showing up.

Investing is actually quite simple: investors get paid for taking an investment risk.

Source: Dimensional Fund Advisers

Since we cannot control or successfully forecast the direction of the markets in the short-term, our job is to help our clients to earn the return that is theirs as the compensation for assuming investment risk.

In that sense we are managing investors (and their emotions, costs, and taxes) more than we are managing investments.

Staying invested is hard to do when the markets are gyrating and in particular at the very top and bottom of the cycle. That is when our counsel is at its most valuable, since you need to do the exact opposite of what your gut is telling you to do.

Source: behaviorgap.com

We keep your costs down principally by recommending investing in low-cost, passive, index funds and simply ‘buying the market’.

An Alternative Course of Action

Increasingly however, more of our clients are telling us that owning the whole market is no longer the most appropriate course of action. This is due to their personal values about investing, their employment, or their existing investments.

Some clients wish to emulate Warren Buffett and pursue more of a ‘value investment approach’ which means buying stocks which are sorted by some relative price valuation metric. Today this means holding more in emerging markets, banks, and oil companies.

Other clients wish to exclude certain sectors from their portfolios and pursue a more sustainable investment strategy. This means excluding certain sectors from their portfolio and overweighting large US companies and technology in particular.

Diversification

Over the last 10 years or so this latter strategy has turned out to be the best approach to take by a country mile, but you wouldn’t have guessed that ahead of time. In fact, almost all the research from a decade ago pointed to the exact opposite – the value companies should have outperformed the growth stocks.

It is for this reason that our default advice is always going to be drawn back to ‘the market’ and holding a broadly diversified global portfolio rather than a concentrated portfolio of a small number of stocks.

In general, you don’t want to bet against the market. As John Maynard Keynes said – “The market can stay irrational longer than you can stay solvent”.

Buy and Hold

The final six months of 2023, and the last two in particular, witnessed impressive surges in both the equity and bond markets. We saw increases of approximately 5.96% for global equities in euro terms and 3.24% for Global Bonds hedged to Euro over the last 6 months of the year.

These gains contributed to year-to-date returns of 18.39% and 4.13% for the equity and bond markets respectively. Emerging markets by contrast haven’t made investors any money for the last decade.

This pattern of strong returns, immediately following large declines, is a common experience throughout an investor’s journey. It’s the main reason why ‘buy and hold’ is most often the winning strategy.