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I worked in the research department and supported advisors for more than 40 years. During that time, I fielded many calls from financial professionals who had anxious clients in their office and needed help with a response. Many times, those clients had heard an economist or strategist on a financial news network forecast a recession, a bear market, or worse.
I often wondered why these guests were so popular on networks like CNBC, CNN, or Bloomberg. Then I saw this quote from Morgan Housel in The Psychology of Money (Harriman House, 2020):
“Pessimism just sounds smarter and more plausible than optimism.”1
Makes sense, doesn’t it?
One of my favorite books is Future Babble: Why Expert Predictions Fail and Why We Believe Them Anyway by Dan Gardner. Gardner builds the book around Philip Tetlock’s long-running research on political and economic forecasting. The central findings were:
- Expert predictions have a poor track record, especially over longer periods.
- The most famous pundits usually had the worst forecasting records.
- Media outlets tended to favor guests who were confident, dramatic, ideological, and willing to make bold predictions.
- More cautious experts — those who qualified their conclusions and acknowledged uncertainty — were generally better forecasters but less entertaining on television.
Don’t Get Too Excited About ‘Experts’
Experts are notoriously bad at predicting the market. Researchers Sandy Campbell and Don A. Moore, in a paper titled, “Overprecision in the Survey of Professional Forecasters” (Collabra: Psychology, January 2024), analyzed 16,559 predictions of major U.S. economic indicators in The Survey of Professional Forecasters, a regularly updated compilation of forecasts that has served as a kind of national benchmark since 1968.2
Campbell and Moore found that forecasters reported 53% confidence in the accuracy of their forecasts but were correct only 23% of the time. Despite this evidence, investors pay close attention to media pundits, many of whom are chosen for their delivery rather than their accuracy.
The challenge I faced, of course, was helping the advisor know what to say to an anxious client who wanted to make changes to their portfolio based on what they had heard.
Most of the time, the advisor was inclined to refute the forecast. If the client heard that interest rates were going to rise, they would push back with all of the reasons why rates might fall instead. If the expert was predicting a bear market, the advisor would give the client reasons why the stock market rally might continue.
A Potential Lose-Lose Situation
I always felt this was a mistake. If you are going to predict the future direction of interest rates or the stock market, you lose no matter what happens. If your prediction is wrong, you obviously lose, because clients will think you don’t know what you are doing. If your prediction is right, you still lose because now you’ve set an expectation that you can predict the future, and eventually you’re going to be wrong.
A better approach to handling these conversations is to explain to the client that important investment decisions should always be based on investment principles, not predictions. Principles form the foundation of a sensible long-term financial plan and are timeless rules. They include the following:
Diversification
We diversify, because the future is uncertain. At any point in time, some of your investments are going to be up, and some will be down. If all of your investments are up at the same time, chances are, your portfolio is not well diversified.
Maintaining a Long-Term Perspective
We invest for the long term because no one can predict the short-term gyrations of the economy, the markets, or the mood of investors. Time is an investor’s greatest ally. Emotion is his greatest enemy. To be prudently hopeful, or sensibly optimistic in difficult times is not casual or careless. Rather, it is a strategy that has won the day, time and time again.
Own Quality Investments
We buy quality investments that have stood the test of time. Quality investments are like tennis balls: They fall when the market falls, but they have a tendency to bounce back when the markets recover. Poor quality investments are like eggs. When they drop, they just make a mess. Mutual funds and ETFs that are low cost, broadly diversified, and fully invested should form the core of most investment portfolios.
Advisors should be clear about where they stand and remain consistent in communicating an investment philosophy based on investment principles. The bad news is that we don’t know what the stock or bond markets will do this year or next. The good news is that we don’t have to know the future to invest your money well.
Alan F. Skrainka, CFA, is the founder of Alan Skrainka, LLC and the author of Principle-Based Investing. He spent 28 years at Edward Jones as Chief Market Strategist and General Partner. His work is published at InvestmentInsights.com and on Substack at Investment Insights by Alan Skrainka.
Citations
1 Morgan Housel, The Psychology of Money (Petersfield, UK: Harriman House, 2020), Chapter 17, "The Seduction of Pessimism."
2 Sandy Campbell and Don A. Moore, "Overprecision in the Survey of Professional Forecasters," published 16 January 2024 in Collabra: Psychology, volume 10, issue 1, article 92953. URL: https://online.ucpress.edu/collabra/article/10/1/92953/200113/Overprecision-in-the-Survey-of-Professional
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
