Why stock market predictions don’t matter

Since the beginning of this year, and the beginning of every year for that matter, there is an abundance of commentary and opinion about which particular sectors or assets will be the ‘must haves’ for 2015. In order to make a name for yourself as an ‘expert’ or go-to person for forecasts, you need to make stock market predictions for the year ahead. And then cross your fingers and hope they come in…

The law of averages dictates that some forecasts must come in. But, for every expert that picks a winner, there will be lots more that don’t. The reality is that the consequences of making predictions that don’t come true have no effect on those making them but can be disastrous for those that follow.

It’s fair to say that certain sectors and assets will outperform others. There will be winners and there will be losers in 2015. But that’s where I draw the line with my stock market predictions.

There’s a valuable lesson to be learned – no-one can accurately predict what’s going to happen in the future. Not me, not you, not a fund manager, and not the market commentator being interviewed on TV. This annual game of guess will no doubt continue each January and there is no doubt that many investors will mistake gossip for gospel. Just make sure that you’re not one of those that do.

So what should you do?

Accept that you can’t predict the future and keep that in mind when making investment decisions. There can be huge variations in performance between sectors and that can make trying to pick the right ones a very risky exercise.

For example, the IA UK Gilts sector was up 14.5% for the 2014 calendar year while the IA UK Equity Income sector was up just 3.2% over the same period. For the 12 months previous (2013), the sectors were down 5.1% and up 25.2%, respectively (source: Trustnet).

So, making a wrong call can have serious repercussions for your portfolio’s performance. And the sector that performs comparatively well one year isn’t necessarily going to be the right choice the following year.

An investor’s toolkit

As an investor, you can overcome these issues. A well-diversified investment portfolio, with exposure to a wide range of sectors and asset classes, can provide much needed balance. As sectors rise and fall at different times, diversifying your portfolio should mean volatility and risk are mitigated. Spreading your portfolio across different assets in this manner should be a key investment principle for anyone. If you’re receiving investment advice, this will be done for you but if you’re a DIY investor, it’s something that falls on your shoulders to organise.

It’s also very important to accompany a diverse portfolio with regular rebalancing. As each asset class grows at a different rate, it’s not uncommon for a portfolio’s initial setup to change. This can mean your exposure to a certain sector or asset class is altered – and your exposure to investment risk along with it.

Again, the task of rebalancing is something an adviser will periodically do, but one that DIY investors will need to address themselves.

Use your time wisely

So, if you do have the time and inclination to set up your own portfolio, make sure it’s diverse and risk appropriate rather than trying to work out what the top performing asset classes of the year might be. If you spend enough time searching the media for stock market predictions you’ll find an argument in favour of most things.

By receiving investment advice you can get help with all of these tasks. With the emergence of online advice, there’s now no requirement to pay the level of fees you might have ordinarily expected to for regulated financial advice. The setup of a diverse and risk appropriate portfolio as well as the periodic rebalancing of your investments, combined with the ongoing support and security of regulated advice is now accessible for any investor. And at a cost comparable to that of a service in which you’d need to do it all yourself. There’s no financial jargon to decrypt or any adviser house calls required, just straightforward and regulated investment advice delivered in a simple, low cost manner. Investing doesn’t need to be complicated.

 

 

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  3. What are your reasons not to invest?

 

Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.

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