WARNING: Market Experts May Be Damaging to Your Financial Health

There are few certain things in life. A well-known aphorism states that the only certainties in life are death and taxes. I would like to add something else to what is certain in life. That is financial experts will make predictions – despite their awful track record.

There has been much research on the accuracy of expert predictions, and most of them are no better than random chance. I have spoken to thousands of financial advisors and individual investors across the nation and everyone agrees that market experts are wrong quite a bit. Yet we are still influenced by predictions, no matter how bad the expert is, because of three reasons: (1) The confidence exuded by the “expert” (2) We don’t take time to find out prior success/failure of the “expert” (3) We don’t really care because the prediction offers a false sense of certainty.

The Illusion of Certainty

computer-shopper-crystal-ballThe one thing the brain hates more than anything else is not knowing. Many times people will say “Just tell me the news, good or bad…the not knowing is the worst.” This is because the brain is a planning machine. When something is ambiguous or uncertain, it cannot plan. So even if the news is bad news, at least we know and can begin to plan the resolution and next steps. This innate desire for certainty and specificity influences us to subconsciously give significant weight to a forecast or prediction…even if the expert has a poor track record.

The problem is not that the experts are uneducated or poorly trained. The truth is that most market analysts and strategists are intelligent and quite sophisticated. The problem, according to behavioral economist Daniel Kahneman, is that their world is unpredictable. So this has nothing to do with the intelligence, education or experience of an individual. It has to do with the fact that they are trying to predict something that is unpredictable.

A Big Forecast From An Expert

Last week Jim Rogers predicted 100% chance that the US is in recession within one year. Are you kidding me? Not 50% chance, not 80% chance, but 100% chance. Jim is a well-known individual in the financial industry; very well respected. He is highly educated, intelligent and has decades of experience. So he must be right. Well, let’s first take a look at his other forecasts to see how prescient he really is.

Most recently, he is on record for predicting recessions in 2012, 2013 and 2014. Anyone who pulled out of the market in expectation of the impending recessions left a lot of money on the table. What will happen this time? Who knows. But we can see that whatever crystal ball or methodology he used in the past was quite wrong. Given this information, and the fact that markets and economic cycles are unpredictable, do you really want to put any weight behind what Jim or anyone else is saying? Eventually the experts may be right (just like a broken clock), but at what cost in the interim?

Market Timing is Not Investing

All investors want to have the upside of the markets without experiencing any of the downside. In an attempt to achieve that impossible scenario, many investors are lured into selling before they anticipate a significant downturn, usually triggered by a prediction or set of predictions. The problem is that such a strategy requires perfect foresight – and no human has that. Anytime investors sell to cash in anticipation of a market downturn, they cease to be investors – they become market timers. They have left the realm of investing and entered into the realm of speculating.