As a financial planner it is one of the most common questions I get asked. But if you ask anyone in financial services for an honest answer, they’ll tell you the truth – a market forecast is nothing more than a guess. And there is just as much chance (or often more) of them being wrong as right.
It’s easy to give an answer though, especially if you are giving a general direction rather than what you think the index will be at year end. And clients will generally feel better when they get one – particularly a confident response. The problem is that most advisers/brokers/fundies are afraid to admit the truth. What do you mean you don’t know? Surely if you are a financial expert, you have a view on this? It just feels smarter to sound like you know what is going on.
Back in October 2015, in the Sydney Morning Herald, Malcolm Maiden quoted some updated forecasts from a couple of big brokers:
- Citigroup expects the MSCI global sharemarket index to be up by 20% at the end of next year
- Credit Suisse is forecasting the ASX200 at 6,000 points at the end of 2016, but as Malcolm points out – they had the same target for 2015!
Back in the early 2000’s I had some fantastic years working at Credit Suisse, which at the time was one of Australia’s leading fund managers. It opened my eyes to a lot of what goes on inside the financial services industry.
Forecasts, target prices, buy/hold/sell recommendations, past performance charts (cleverly designed to only ever show good performance) – all contribute to higher levels of transactions and chasing of returns. Often this leads to worse outcomes for investors through lower returns and higher fees.
A couple of years ago, an Aussie shares broker gave me a long list of reasons why he thought investors shouldn’t touch fixed interest at the time. In the next 12 months Australian Fixed Interest was up 9% and International Fixed Interest up 10% while Aussie equities were flat.
The trouble with relying on forecasts to build a portfolio is:
- how will you choose which prediction to take notice of and;
- what will you do when they are wrong.