It is the time of year for predictions and I’ll make one, said Jeff Sommer in The New York Times in December. You will be better off ignoring the Wall Street stock-market predictions for 2020.
Sommer then went on to point out the extent to which many Wall Street strategists are flagrantly inaccurate.
Since 2000, Paul Hickey, a co-founder of Bespoke Investment Group, has compared the annual Wall Street consensus forecast in late December with the S&P 500 one year later. He found that, on average: the median forecast was that the index would rise 9.8% when it actually rose 5.5%. A 45% gap. The median forecast was that stocks would rise every year for the last 20 years, but they fell in six years. The consensus was wrong 30% of the time.
In 2008, when stocks fell 38.5%, the median forecast called for a rise of 11.1%.
"We don’t try to forecast the future," Sommer quotes David Booth, the co-founder of Dimensional Fund Advisors, as saying. "One way of thinking about risk is to imagine that a terrible downturn is about to occur. It will happen, if you live long enough. You can count on that."
Booth’s advice: when you have some money to invest, put it into low-cost, diversified index funds. If you are a conservative investor, consider a portfolio with 25% stocks and 75% bonds.
In the worst stock downturn in our lifetimes, from October 2007 through February 2009, when global markets fell 55%, this hypothetical conservative portfolio would have lost about 13.5% — and recovered all of the lost ground within seven months.
"There are, of course, no guarantees that these returns will be duplicated in the future," says Booth. "But it is, I think, a reasonable approach to the future, based on the record of the past."
It is not a forecast.
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