Beware crystal ball gazing
Financial advisers and investors should think carefully before acting on the latest round of New Year predictions for economies and markets, van Eyk Head of Strategic Research Jonathan Ramsay cautions.
Mr Ramsay said while crystal ball gazing was popular this time of year, planners and their clients need not take this as a sign that predictions should be acted on or that they were any more relevant than predictions made at other times.
“There’s no inherent reason why the experts should be better at predicting the future now than they are at any other time of the year,” Mr Ramsay said. “One needs to be careful that someone’s holiday reading isn’t allowed to set the agenda for the rest of the year.”
He said it was also an interesting exercise to look at which experts and commentators made their predictions from previous years readily accessible so their record could be judged and which ones appeared to ”wipe the slate clean”. “Those who are prepared to raise last year’s predictions and discuss how close they came to reality and why should be treated with more credibility,” Mr Ramsay said.
Despite these reservations, Mr Ramsay said attempting to predict the future and identifying which themes will shape markets in 2013 could be a useful exercise because it forced analysts to refocus their views. The results could also be beneficial to financial advisers and their clients as long as they understood how to use them properly.
Mr Ramsay offered these tips:
- Try to avoid clutching at opinions that will make you feel good about the performance of your investments last year. “With so many views flying around there is something to suit everybody’s prejudices,” Mr Ramsay said.
- Don’t overemphasise the link between investment themes and asset class returns. “While it’s easier to talk to clients about big, tangible market themes they do not necessarily translate into market performance,” he said. Furthermore, many of the most prominent themes will be well known and already priced into markets. “Having a strong valuation process and discipline can help identify which themes are the most fully discounted by the market.”
- Themes and predictions need to be assessed in terms of the probability that they will be correct and what would happen to an investment portfolio if they aren’t. “It’s important to assess what would happen to your investments if the future doesn’t pan out as you thought it would and look at which scenarios have the biggest impact on returns,’’ Mr Ramsay said. “Again, having a rigorous approach to asset valuation helps you identify which outcomes matter most.”
For example, van Eyk believed that the probability of a Euro breakup was high in 2012 but assessed that this level of pessimism was already priced into the market so it was not reflected in our asset allocation.
“We were also overweight Australian equities in our balanced model portfolio despite the apparently poor economic fundamentals because equities were so attractively valued, a strategy which proved to be the right approach,” Mr Ramsay said.