By Ken Bloom, J.D., LLM
Ken JPEG
Every year at this time I am amused when reading the investment publications, financial websites or hearing on TV shows that trumpet market predictions for the coming year. CNBC devotes entire shows to market forecasts. Investors believe that if they follow these market gurus they are guaranteed success. I am often asked at meetings or speeches about these predictions especially since they are issued by reputable and well-known individuals, firms or companies.

The reality is very different. Stock market predictions are notoriously wrong and following market predictions can be very dangerous. At the beginning of 2008 a survey of market strategists by Bloomberg predicted that the stock market would increase at a rate of 12% plus dividends. Not one of the analysts surveyed predicted that the stock market would see its worse in almost 80 years.

On December 31, 2013 Standard & Poor’s 500 Index closed as 1848.36, an all-time high. This represents a gain of 29.6%. Including dividends, the total return was 31.9%. The experts, of course, were completely wrong. According to the website, Business Insider, the market predictions for 14 top Wall Street strategists range from a low of 13.90 to a high of 16.15. The closest prediction was off by over 300 points, a miss of almost 20 percent!

The 2008 and 2013 predictions are not unusual. The fact is market predictions are like predicting one year in advance who will the college football championship. One year ago, the overwhelming favorite to win the college football championship was Alabama. They did not even play in the championship game. Tiger Woods is always listed as the favorite to win a particular major and he has not won a major since 2008. The list is endless. The fact is predictions of future events are good only for conversation and controversy. In the area of investing they are like market timing – a flawed strategy

Having a broad-based, diversified portfolio tailored to your individual needs and risk tolerances is guaranteed to win in the end regardless of what the “experts” predict for the market in the year to come.

So the next time you watch Kramer on CNBC, enjoy it for the entertainment value, but don’t plan your portfolio around his or any pundit’s advice.