Tune Out the Noise!

I have often said that it is important to ignore the short-term "noise" so often heard in the markets. This noise emanates from the financial media as well as from some very highly paid professionals. (Please note: the size of one's paycheck does not signify brilliance.) While catching up on some reading over the weekend, I came across an article on MarketWatch titled, Chart of Shame: The S&P 500 vs Everyone Who Said the Market Was About to Crash. This article contained the following graphic compiled by Jon Boorman of Broadsword Capital.

Wow! This chart says it all. There are over 25 quotes from some highly paid and well respected stock market pundits from 2012-2018. All of them warning about an upcoming market crash that never materialized. Total and complete wrongness. I especially love the two "Sell everything!" directives in 2016. Since 2016, the S&P 500 has climbed an impressive 40%! If you had heeded their warnings and moved your money to cash, your investment portfolio and possibly your long-term financial goals would have taken a serious hit as you sat on the sidelines during this strong market rally.

The financial media's main mission is not to help you succeed as an investor, but instead to generate digital clicks or old-fashioned magazine sales. It's about them, not you. Sensational headlines like "The Big Crash is Coming!" sells many more magazines than a more useful headline such as "Everything is Fine. Stay the Course". Yes, I know that these headlines are usually backed up by some very credible sounding and well-researched rationale. However, the track record of these stock market pundits' predictions is horrendous.

Economist John Maynard Keynes famously said, "The only function of economic forecasting is to make astrology look respectable." Let's take a look at the accuracy of some of these so-called forecasting experts. The website Econlife.com provides a very telling report card on their past performance. When they looked at 12 month market predictions (i.e. what the "expert" thought the market would do over the next 12 months) made between 1998 and 2016, they found that 92% of the time the "market expert" predicted that the market would rise. The stock market has historically gone up more than it has gone down, so this was a pretty safe prediction from a probability standpoint. Not surprisingly, they were right 92% of the time. Most investors are more concerned about knowing ahead of time when the market is going to drop. So how did the "experts" do when it came to accurately predicting market downturns in the coming 12 months? Only 9% of the predictions accurately predicted the market downturn. Utterly worthless! Why would anyone ever listen to these people?

My portfolio methodology does not rely on forecasts. I think that we can clearly see that there is little benefit to listening to the well-paid "experts". Instead, I rely on a methodology that is based on the laws of supply and demand. We all understand why there are lemonade stands in the summer and hot chocolate stands in the winter. When there are more buyers than sellers willing to sell, prices must rise. When there are more sellers than buyers willing to buy, prices must fall. It's easy to follow the rules of a methodology when things are going well, but it's when the going gets rough that we need the rules the most. I don't listen to the "experts" who are telling us what the market should do. And either should you. I listen instead to what the market is saying. When U.S. stocks are no longer in demand, that is when I will know that it's time to alter our allocation or raise cash in our portfolios.