23/12/2022
Read these things if you find them interesting, but don't rely on them – or those who produce them – to guide your investments.
Accept that you have to invest without knowing what will happen to your money in the short term. So make sure, first, that you put enough money away in a safe place, like a bank account or money market fund, to pay the bills in the coming months.
But because the stock market tends to rise over long periods, and because bonds now generate reasonable income (as I explained last week), it's wise to invest for a decade or more in low-cost index funds that track the entire stock and bond markets.
Do not base your investments on specific predictions of where the stock market is headed in the short term, because no one knows. Betting on these predictions is gambling, not investing.
Consider how bad Wall Street's forecasts were.
In 2020, we find that the median Wall Street forecast since 2000 has missed its target by an average of 12.9 percentage points per year. That error over two decades was staggering: more than double the actual average annual performance of the stock market!
Imagine an equally bad weather forecast. A weatherman says the high temperature the next day will be 25 degrees Fahrenheit and it will snow, so you dress for a winter storm. In fact, the temperature turns out to be 60 degrees and the sky is clear. This is the level of accuracy for Wall Street strategies through 2020.
They continued their erratic ways the following year, issuing an average forecast of 3,800 for the S&P 500's closing level in 2021. But the index ended the year at 4,766.18, an error of about 25 percent. In a word, the forecast was dire.
Predictions for 2022 seem inaccurate, as usual, although we won't know for sure until later this month. A year ago, the consensus on Wall Street was that the S&P 500 would reach 4,825 at the end of 2022, a modest increase from 2021. But right now, the index is hovering around 4,000. In other words, a year ago, strategists were saying 2022 would be good for stocks. It was not.
The future
After forecasts that were too low for 2021 and too high for 2022, Wall Street strategists are holding steady for 2023. The consensus is that the S&P 500 will end the year at 4,009, roughly around where it has been trading for the past few days.
That could be right. Who knows? But if it turns out to be correct, it will be an accident, not the result of strange knowledge about 2023.
This inability to forecast the future goes far beyond Wall Street. Pandemics are part of human history and we know there will be more. But no one was able to anticipate the specific coronavirus pandemic that began in 2020, or the 6.6 million deaths, 646.2 million cases, and the complex economic and financial damage it continues to cause. So what do you think it is worth trusting in the forecasts of speculators on Wall Street? May the new year, which is approaching extremely quickly, bring you maximum joy and health.