It seems each week there’s a new forecast for GDP, stocks or any other economic factor under the sun. Take a browse through Twitter and you’re sure to come up against dozens of experts sharing their take on what’s going to happen next. But the essential question is how trustworthy are these forecasts?
Just How seriously should investors take forecasts when making portfolio decisions?
The answer? With a grain of salt the size of the iceberg that sank the Titanic. And that goes not only for so-called stock gurus, but also for central bank and international economic bodies that issue highly watched market outlooks.
While there is always some margin of error involved with prognosticating, the real performance of forecasts made by government analysts, private institutions and market watchers compared to observed values doesn’t justify putting much faith in such projections.
The question of accuracy has been examined by bodies including the Federal Reserve and International Monetary Fund alike; the issue seen in their own audits keeps pointing to the fact forecasts are almost always too optimistic. The rose-colored lenses persist to such a degree that forecasts are often at their most overly confident when markets experience bottoms.
The problem this presents is forecasts are a major tool for active investors. Fund managers and stock pickers looking to get ahead of the market use predictions to inform their trading. Given the veracity of forecasts, there’s concern such strategies can actually beat the market.
Index or passive investing, by comparison, offers investors a way to capture the actual returns that the market provides historically — no guessing about which team wins the Super Bowl involved. This is the approach OBS takes with structured investing.
Download our white paper “The art of forecasting” to learn more.