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The Problem With 2011 Market Predictions


Predictions only reinforce the myth that it's best to leave investing decisions to "experts," and that it's okay to take a hands-off approach to managing your hard-earned capital.

Toward the end of December, the media outlets, desperate for something -- anything -- to fill their pages and airwaves with, start asking so-called gurus, experts, and other sundry market characters where the various indices will be this time next year. Unfortunately, the predictions have been starting to roll in. It's an easy pitch to hit, because if you get it right, you can crow about it in 12 months; but if you get it wrong (and odds are that you will get it wrong), nobody ever calls you on it.

The problem, though, is that this sort of behavior gives the general investing public the impression that they're getting sound, actionable advice. Should we take a random prediction that the S&P 500 is going to be within spitting distance of all-time highs on December 30, 2011 to heart, dump everything into an index ETF, and call it a year? Does it mean that we should ignore any developments over the next 12 months because someone wants some face-time on TV, and in order to do so, has to make some silly prediction when all the regulars are busy sipping eggnog by the fireplace?

Ultimately, the thing that we, as individual investors, should be focusing on is what happens in between. We may finish up 30%, down 30%, or flat, but the key to long-term success in the market is making sure that we are reacting to whatever it is that the market gods decide to throw at us. Predictions only reinforce the traditional Wall Street myth that it's best to leave investing decisions to those who "know best" and that it's okay to take a "set-it-and-forget-it" approach to managing your hard-earned capital.

Looking back at the consistency of the action over the past 19 months, such an approach looks to have been the way to go, which is ironic, since even mainstream media outlets were starting to tell us that the buy-and-hold approach was dead. For many, though, the conditions have been exceedingly difficult to navigate. Despite the gains, we're in an environment where there's a huge disconnect between what's happening in front of our eyes out in the "real" world, and what's been happening on the corner of Broad and Wall.

The market gods, of course, will never make it easy, but if you pay close enough attention, you'll see that the lessons they teach are consistent. Above all, respect the pricing action, don't fight the trend no matter how astonishingly well-reasoned your arguments are, and never ever second guess a Fed that tells you it's going to pump a tremendous amount of money into the system.

Which brings me to the moment that I'm sure you've been waiting on pins and needles for: my incredibly insightful, piercingly intelligent, earth-shattering prediction for 2011. The action will remain unpredictable, and the market gods will do their best to confound us at every turn. But they will continue to offer opportunities to those who are willing to put in the work.

Merry Christmas and Happy Holidays!
No positions in stocks mentioned.
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