Self-proclaimed financial gurus: Less accurate than a coin toss, so beware of the risks
You've doubtless heard the saying, “Beware of strangers bearing gifts.” You should also beware of gurus bearing predictions.
These gurus are ubiquitous. It's kind of like predicting the winner of a football game: No one focuses on the wrong predictions after the actual outcome, so these gurus aren't held accountable. They are able to stay in business when, in fact, they are often no better than snake oil salesmen, promoting their own agendas, usually in the form of products or services.
Self-proclaimed financial gurus are a plague to investors, because many people will act upon their predictions, to the detriment of their portfolios. The fact is that more often than not, these gurus' forecasts are wrong.
This is pretty remarkable when you consider that the overwhelming majority of gurus' market forecasts predict that major indexes will go up or down, so you'd think they could be right 50 percent of the time. But by at least one measurement, on average they are right only 48 percent of the time. That's right: You could toss a coin and, on average, you'd be right more often than the gurus.
The 48 percent figure is the finding of CXO Advisory Group, which has been tracking market forecasts since 1998. The accuracy of these forecasts has been lower than 50 percent since 2000 — a record so abysmal that CXO no longer sees any point in tracking them. After all, what's the advantage in determining the winners of a race to mediocrity or even worse?
The statistically inclined might ask how the average of up or down market predictions could not work out to 50 percent. Here are two possible explanations for this: 1) Some gurus tend to follow each other, leading to more incorrect forecasts than correct ones; and 2) Some tend to make extreme forecasts to get attention, decreasing their accuracy records.
Don't oblige the attention seekers. Instead, you should ignore them — not just because they're so often wrong, but because no one can be right enough of the time to make a positive difference in portfolios.
The crux of the matter is that anyone who believes in forecasts also believes in trying to take advantage of them by timing the markets — investing according to changes in the market that they believe will certainly or probably occur.
Yet market timing is a fool's errand, because there's no way to predict the direction and timing of changes in a market that is random by nature, unless you believe in ESP.
There is no predicting the next hot stock. Right now, Apple is the largest company in the world, with more than $40 billion in annual revenue. Five years ago, this company wasn't doing so well. In the movie "Forrest Gump," the main character just happens to invest in Apple (for its initial run-up) and gets rich, though he has no idea what he is doing.
Of course, there's much more to successful investing than this, but the sudden wealth of the hapless Forrest proves two points: 1) You never know; and 2) Hindsight is 20/20. Just because that company is highly successful now doesn't mean there was any way to know for certain, in advance, that its stock is cheap.
There's no predicting the next big sector. Sure, big gains can come from tech stocks, but there's no telling for sure when that will come. In the meantime, there could be years and years of losses.
By accepting the principle of uncertainty and randomness in financial markets, you can immunize yourself against gurus' predictions. Ultimately, you're the one who decides where your money goes, because you must live with the consequences.
So don't turn your investing judgment or discretion over to gurus by leaping in the directions they point to. Instead, maintain a beautiful, globally diversified portfolio, rebalance it regularly when needed, and don't be tempted by the flavor of the month offered by gurus who do a better job at making money from you instead of for you.
Tim Decker, a fee-only financial planner, is president of ISI Financial Group in Lancaster. He is the author of "The Sleep-Well-At-Night Investor" and host of the radio program "Financial Freedom," which airs at noon Saturdays on WHP-AM 580. Contact him at www.isifinancialgroup.com.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it should not be relied upon for legal or accounting purposes. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.