This is the time of year when pundits come out of the woodwork to announce their financial predictions for the year. They claim to know the future accurately, and purport to have a track record to prove it. It’s an attractive and easy proposition for many investors to follow this advice, especially when there is confusion and uncertainty in the market. Everyone wants to
protect against unexpected risks, and accomplish their family’s most important goals.
The unfortunate truth about the crystal ball is that it doesn’t exist. If it did, there would always be some investors who are ahead of the market, buy just ahead of rallies, and sell just before downturns. They would be billionaires, and have great stories to tell at cocktail parties.
The reality is that many of the pundits work at think tanks, or sell their advice by subscription to investors. If their prognostications actually worked, they probably wouldn’t have to pull a salary at a think tank, or depend on payments from their subscribers.
As an example, David Stockman is an American politician and former businessman who served as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget under President Ronald Reagan. He is relentlessly bearish. Following the 2016 tax law, he predicted a downturn as steep as 70%. However, the S&P 500 rallied 13% in that year. He also forecast crashes in 2012, 2013, 2014, 2015, 2017, and 2018. He is predicting another downturn now for 2019.¹
GREED AND FEAR
Investors should be cautious because many gurus play on greed or fear. A good example is the frenzy over bitcoin investments last year. Bitcoins are a “cryptocurrency” created by Satoshi Nakamoto back in 2009. It is a digital currency that is completely unregulated and completely decentralized. New units of bitcoins are generated by the computational solution of mathematical problems, and operate independently of a central bank.
In January 2018, each bitcoin was valued at $14,207². Pantera Capital predicted that bitcoin would be selling for $20,000 by the end of the year. Kay Van-Peterson, Global Macro-Strategist at Saxo Bank, projected that bitcoins would be worth $100,000 by the end of 2018.³ Some grandmas were emptying their savings accounts to buy bitcoins. Now the bitcoin is worth $3,500, despite predictions of limitless wealth.
The current government shutdown is making everyone nervous. Soothsayers are working overtime guessing when and how it will end, and how it will affect the market. The ZeroHedge website reminds us that there have been 20 government shutdowns since October 1, 1976.⁴
The following data show the average impact of a government shutdown on the Standard & Poors 500 index:
- 47% of the time, the market didn’t go down at all
- In the 2 weeks during and after the shutdown, on average the market went down 0.13%
- Then, in the month after the shutdown, the average gain in the market was a positive 0.25%
No one likes increased volatility or a government shutdown, but this is not a time to search for magic solutions or submit to panic. One way to improve your portfolio is not to put all your eggs in one basket, for example relying solely on U.S. large company stocks. A globally-diversified portfolio spreads your investment into asset classes that include U.S. large, medium and small companies, global large, medium and small companies, short-maturity bonds, emerging markets, real estate and gold. It’s unlikely that all of these asset classes will go down at the same time, and the diversification will help to reduce volatility during uncertain times.