Investors are constantly bombarded with economic and stock market forecasts. These “experts,” as they are often referred to, are employed by many different financial institutions. Banks, asset managers (i.e. mutual funds), broker-dealers, online brokers, and insurance companies often have at least one economist or strategist on staff. Some of the larger institutions have dozens of strategists.
Purported Purpose of These Experts
These financial “experts” have one primary job – analyze economic and market data to provide guidance for the firm and the firm’s clients. Or, in the case of the Federal Reserve, tell the public about what they expect will happen. This sounds great in theory. Unfortunately, it doesn’t work well in real life. Studies have shown that market forecasters are right less than half the time.1
Experts’ Real Purpose
If these financial “experts” are often wrong with their forecasts, why are they still employed? That is a very good question! With such a poor forecasting track record, you would expect heads to roll. Unless, of course, their primary purpose wasn’t to generate accurate forecasts.
The main purpose of these “experts” is to get you to tune in. Tune into them and the firm they represent. They are not experts in predicting economies and markets. They are experts in getting you to tune in.
What’s An Investor to Do?
Our brains are made of gray matter, but they hate gray areas. The illusion of certainty that financial forecasts provide is candy to our brain. It is so desirable, and when the “expert” is confident and provides supportive data, we may be unconsciously swayed to believe and act on such a forecast.
The best thing investors can do is ask themselves one question: Is what the “expert” forecasting actually knowable? Is it predictable? Just like roulette, it doesn’t matter how many years of experience or PhD’s one holds, if the future event is unpredictable, it is unpredictable.
It is best for investors to take forecasts worth a grain of salt. They are seldom accurate and, due to the illusion of certainty, may influence investors to abandon a thoughtful investment strategy. Economists and strategists will likely remain part of Wall Street. But that doesn’t mean you have to heed their forecasts.
1. CXO Advisory. Guru Grades.