January is the time of the year where there is no shortage of expert predictions about financial markets and the economy. And this year the start of a new decade makes us wonder what the new ’20s will look like and how they will compare to previous decades. But, just how useful are those expert predictions for investors? Is there something we can learn from them, and how should we prepare our portfolios for the next decade?
Well, if you are interested in that question, you are in luck, because there is no shortage of expert predictions about the future and available data to check their accuracy. Here is a summary of the lessons we can learn.
- You can’t predict the future. Obvious? If it was that obvious, how do you explain all the predictions and recommendations based on them?
- Don’t change your portfolio based on predictions about the markets or the economy.
- Luckily, you don’t have to rely on predictions to have a satisfying investment experience.
Last year’s predictions vs reality
Let’s start with the most recent year, 2019. There were plenty of predictions for 2019 after global stock markets experienced serious declines in the fourth quarter of 2018. At the time, every investor wanted to know what was coming next. Some experts expected a bad 2019, and urged investors to get out of stocks altogether. Many did, and stocks experienced record outflows in December 2018.
2019 Predictions
Last year the IMF lowered global growth expectations for 2019 citing weakness in Europe and the emerging markets. In Europe, slow growth was predicted in Italy over fiscal policy concerns and the UK over Brexit concerns. In emerging markets weakness was expected in South Africa, Argentina, and Turkey. Bright spots were expected to be Japan and India.
2019 Reality
Emerging market stocks returned 18% in 2019, international developed markets returned 22%, and the US stock market returned 31%. So much for the expected weakness. Across developed nations, Italy was one of the best performing countries, with a 27% return. The UK was in the middle of the pack with 23%. Among emerging markets, South Africa (11%) and Turkey (13%) had respectable returns, ending the year in the middle of the pack for emerging markets. Argentina finished at the very bottom, with -18%. So, one right for the experts. The bright spots of Japan and India? Japan returned 20%, below both Italy and the UK, and India returned 5%, below both South Africa and Turkey. (Source: all the returns based on MSCI indices for each region or country).
2019 Lessons
You can’t predict performance with any useful reliability. The performance across countries shows that. And being the top-performing country one year does not make it more likely to perform better next year. As a result, investors should not worry about picking countries and instead hold a globally diversified portfolio. But the bigger lesson of 2019 is that you cannot time the markets. Investors who got out at the end of 2018 have learned this the hard way, by missing a 31% return in the US and 20% across ex-US markets. And it’s not just 2019. Here is a look at how much investors can miss if they fail at market timing. Missing just a few days can mean a big opportunity cost.
Data source: Dimensional Fund Advisors
Decade long lessons
We now know that the 2010s were one of the best decades in recorded history for stocks globally. But did experts expect it? Remember that financial markets were just coming out of the global financial crisis, and the worst-performing decade in recorded history for stock markets. The period 2000 to 2009 is termed ‘the lost decade’ for a reason. Stocks returned -1% a year, as measured by the S&P 500, the lowest returning decade recorded for the S&P 500, even including the 30’s. The big government intervention that propped markets in 2009 came to an end, and it was uncertain whether the stock market could stand on its own.
Predictions
Not many were expecting much growth for the decade. The WSJ published an article titled “Bull Market Exhibits Signs of Aging.” Many experts predicted a correction at the beginning of 2010, and many investors pulled out of equities, according to the article. There were numerous reports about the slowest recovery recorded in history after the recession, and a new term was coined: “the New Normal,” according to which growth in the US economy would settle at a lower rate than that experienced historically. Greece defaulted on its debt in 2009, and for a while, it looked like other European countries (like Ireland, Spain, or Italy) could follow, the so-called Euro Debt Crisis of 2011. Then we had Brexit in 2016.
Reality
On a total return basis, stocks more than doubled globally in the decade. The average return over the decade was close to 14% for the S&P 500 and about 9% for the MSCI All Country index, annually.
Am I cherry-picking? Maybe a little bit. You always find a wide range of predictions, so some of them may have been right. But there is a way to address the question more objectively, by testing the following question: “Have investors or investment managers who relied on stock picking or market timing based on predictions been able to do better than a simple strategy of holding a market index?” Here is one answer, from S&P Dow Jones. Over the 10 years ended in June 2019, 88% of active funds (those that actively deviate from market indices to place bets on individual stocks, industries, or time the market based on forecasts) failed to outperform a passive benchmark. To learn more about this topic, see here.
Lessons
Equities have returned about 10% on average annually, over the last 90 years or so. It would be great if we could get the high returns that equities have offered without the volatility that comes with it. But we can’t. So, here is my advice for the 2020s. Make a meaningful plan. Then review your investments by answering the most important investment questions. Change the way you think about investing. Realize that you don’t have to be good at predicting markets or the economy to benefit from the power of financial markets! If you’d like to upgrade your investment experience, check out our approach, and give us a call.
Until Next Time!
Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
Photograph by: Drew Beamer
