Swedroe: Last Year’s Financial Predictions

January 08, 2015

Investors who moved to cash to protect themselves against an overvalued market paid a steep price. Score: 1

The fourth sure thing is that, after the continued injection of fiscal and monetary stimulus into the economy, we should experience a sharp rise in inflation. The November Consumer Price Index (CPI) report, released in December, showed a year-over-year increase in the Consumer Price Index for All Urban Consumers (CPI-U) of just 1.3 percent. Score:1

The fifth sure thing follows from the fourth. It's that rising inflation should lead to a falling dollar. The dollar index closed 2013 at 80.29. It finished 2014 at 90.64. Score: –1

Again, the sixth sure thing follows from the fourth and fifth. It's that gold should rally in 2014, reversing the sharp fall it had experienced. Gold closed 2013 at $1,205. Gold ended last year at $1,184. Score: 1

The seventh sure thing is that the municipal bond market should be hit both by interest-rate increases and default problems, keeping investors away. We've seen neither rate increases nor default problems. In fact, Vanguard's Short-Term Tax Exempt Fund (VWSTX) returned 0.65 percent in 2014, its Intermediate-Term Tax Exempt Fund (VWITX) returned 7.25 percent, and its Long-Term Tax Exempt Fund (VWLTX) returned 11.08 percent. Score: –1

The eighth sure thing is that economic recovery will continue down its tepid path. The Philadelphia Federal Reserve’s Survey of Professional Forecasters predicted GDP growth of 2.6 percent in 2014. The revised first quarter figures showed the GDP fell 2.1 percent.

However, the September revision to the second-quarter growth rate raised the estimate to 4.6 percent. And the latest figure, for the third quarter, indicated GDP growth of 5.0 percent. Despite the strong snapback, we’ll call this an accurate forecast. Score: +1

The ninth sure thing is that, after defying the gurus in 2013, the volatility of the market will rise. The VIX ended 2013 at 13.72. The VIX closed the first quarter of last year slightly higher at 13.88, but it decreased significantly to close the second quarter at 11.57 after falling steadily for most of May and June. And it remained steady into early September.

However, the last three weeks of the month saw an increase in volatility. The VIX closed the third quarter at 16.7. While it closed on Dec. 30 at 15.92, and it traded at around that level on the final day of the year, at the close it had jumped to 19.2. We'll put this one in the plus column. Score: +1

Our tenth and final sure thing is that active management will beat passive management in net returns. Despite an overwhelming amount of academic research to the contrary, an astonishing 75 percent of advisors believed this to be true, according to an InvestmentNews report from January 2014.

The midyear SPIVA report showed that for the 12-month period ending June 30, 60 percent of large-cap managers, 58 percent of midcap managers and 73 percent of small-cap managers underperformed their benchmarks.

And Jason Zweig, writing in the Wall Street Journal, reported that as of Dec. 19, more than 79 percent of U.S. stock funds had failed to beat their market benchmarks for the year, compared with an average of 59 percent of funds over the previous 25 years. Score: –1

Before tallying up the total, it's worth noting that perhaps the biggest event in 2014, the collapse in oil prices, was a huge surprise to not only the market but also for two of the market's biggest-name "gurus." John Paulson and Carl Icahn each suffered major losses as a consequence of their bets on energy.

Our final score for the sure things of 2014 is three correct predictions and seven wrong ones. It's pretty apparent that even the "sure" things didn't turn out to be sure. In fact, we've been providing our "sure things" scorecard since 2010, and not once has a majority of them occurred. Here's the year-by-year breakdown:

  • 2010: 1 right/4 wrong
  • 2011: 3 right/5 wrong
  • 2012: 2 right/3 wrong
  • 2013: 1 right/6 wrong
  • 2014: 3 right/7 wrong

The academic and peer-reviewed research indicates that past isn't prologue and there are no good forecasters when it comes to performance. Keep this in mind the next time you're tempted to give credence to some guru's forecast instead of adhering to a well-thought-out and long-term financial plan.

Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.



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