Beware of the silly season of investment advice

This is a trick title, because it seems there are always examples of financial forecasting foolishness. But it does seem as if the silliness escalates at year-end, when it’s especially tempting for financial gurus of various stripes to reflect on the year about to pass and – here’s where the trouble starts – suggest that you should alter your investment strategy to prepare for whatever the new year has in store.

That’s silly.  It would be laughable, if it weren’t for the damage it can do to your financial health.  As Barry Ritholtz commented in this excellent Globe and Mail piece from last year’s silly season:

Forecasts and predictions are exercises in marketing. Outrageous and wrong forecasts are typically forgotten, and when one randomly happens to come true, the guru is lauded as the next Nostradamus. It is an expensive and fatuous practice, and the finance industry should give it a permanent rest.

But what about big bankers, brokers and similar credentialed professionals – the ones who seem to be “in the know”? Are their forecasts more dependable?

The nice thing about an evidence-based investment strategy is that there is always data to test these types of premises.  In fact, someone did exactly that for 2015, in the article entitled “Most Banks Are Screwing Up On Their Stock Picks.” The conclusion was that the big global investments banks only had a 43% rate of accuracy. Yes, that is correct: Flipping a coin offers better odds.

Even if I’ve convinced you to think twice (at least!) before buying some XYZ stock because a big bank has added it to its “focus”or “conviction”list, there lurks another, more subtle risk.

Aggregate silly predictions have a serious way of getting under our psyches, influencing our wider investment decisions. For example, at year-end 2016, I’m seeing the usual litany of forecasts, preying on the usual investors’ fears: the stock market is over-valued. Bonds are heading for a fall. So is the Canadian dollar.

Maybe all of this will happen, maybe not. Either way, the forecasts tend to colour our moods. I hear investors deciding to hold onto their cash, “until after the correction,” or sell their bonds or load up on U.S. $ investments, “just in case.”

The problem is, skating after all these thin-iced “maybes,” you’re likely to lose your way to your goals – the ones that typically call for decades of disciplined resolve if you hope to score. Dimensional Fund Advisors commented in its own overview of the silly season (they call it “the prediction season”):

Those who make changes to a long-term investment strategy based on short-term noise and predictions may be disappointed by the outcome.

In all seriousness, I recommend you build a solid financial plan according to your own long-term goals, and most importantly … stick with it through all the market’s seasons.