When it comes to investing, we all wish we had a crystal ball or could find some pattern in returns that would help us be in the right investment at the right time. You would think the collective knowledge of Wall Street would be able to make some pretty accurate forecasts, but that’s just not the case. The December 2013 Business Insider article linked below compiled the forecasts for the S&P 500 from 14 of “the top stock market forecasters.” The results showed that the average forecasted S&P 500 target for 2014 was 1,949 with a median of 1,950 which would have been approximately a 6% increase from the closing value of the S&P 500 on December 31, 2013. What actually happened was a 12% increase in the S&P 500 with a closing value of 2,058.90 on December 31, 2014.
You can find all kinds of predictions that were made for 2014; it’s really quite fun to look back and see just how few got anything right. One of my favorites was an analyst who predicted that the road to $150 oil would begin in late 2014 . . . oops!
One of the reasons we build globally diversified portfolios is because history has shown no one can consistently predict which markets will do the best or worst in future time periods. Just look at the chart below, provided by Dimensional Fund Advisors. The chart shows asset classes ranked by calendar year return for the years 1999 to 2013. Can you find a pattern in the chart? Would you have predicted that U.S. real estate would be the top performer in 2014 based on how it did in 2013? If you made the decision to move funds away from U.S. Real Estate at the end of 2013 and into the Russell 2000 index to gain U.S. Small Cap stock exposure because of its performance in 2013, you would have experienced a return slightly less than 5% on those funds in 2014. That isn’t terrible, but it’s certainly nowhere near the 38% U.S. Small Cap stocks returned in 2013, and also far short of the 32% the Dow Jones US Select REIT Index returned in 2014.
With U.S. Large Cap stocks finishing near the top of the rankings the last two years, a lot of investors may be questioning the wisdom of investing in other market segments. But doing this could have a negative consequence on your portfolio. According to Vanguard’s chief economist, Joseph Davis, Ph.D. in his September 29, 2014 blog post, The greatest risk in the market today is…, “Any study of historical cash flows has tended to show that cash flows into any investment or asset class trail recent performance and peak when premiums are the slimmest.” I’m not saying next year won’t be a really good year for the S&P 500, but as the SEC performance disclosure requires, “Past performance is not an indication of future results.” Stay diversified, folks.
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