When questioned recently about whether the Bank of England had been overzealous in its gloomy post Brexit economic forecast, its Chief Economist Andy Haldane admitted “yes – that’s a fair cop.”
Now, I’m not criticising Andy Haldane, in fact I respected the fact that he didn’t try to dodge the bullet, as politicians do, and gave a straight answer. He conceded to the interviewer that it was indeed a“Michael Fish moment”, referring to the BBC Weatherman who told the story of a caller to the BBC who had warned of a hurricane in 1987. Mr Fish had famously told the UK that no such thing would happen, only to be proved wrong a few hours later.
Watch the Andy Haldane comments here
The problem with forecasting – economic or meteorological – is that people remember the times when you got it wrong big time, but forget all your correct predictions. I would imagine that a number of people looked back on 2016 as a year of surprises. And many may wish they hadn’t been so vocal about the certainties of the EU referendum resulting in remain and the US presidency putting Mrs Clinton into the Whitehouse.
Watch the Michael Fish prediction here
So on a national scale, the main problem is that the media – be it TV, radio, press or social media allows us to enjoy retrospective satire at the expense of those who got it wrong. But what does forecasting mean for you and your financial future?
The parallel is straightforward: Just like very few people would have predicted the 2016 events I referred to, no-one knows how world events will pan out and how the markets and investments will react. And just to bring it right to your doorstep, that affects you: Your pension, property, business, investments – are all in some why tied to economic ebbs and flows.
In an interesting article in the Sunday Times Money supplement, columnist Ross Clark spent a month“fantasy trading” (not spending real money) on the FTSE. His strategy involved looking at how his investment would have fared had he predicted a winner every day, a loser every day and if he had just made an educated guess. His conclusion? That even having been intelligent about his investments, he usually got it wrong. He says:
“It shows the pointlessness trying to predict winners in the stock market…it confirmed to me what I already knew: that the best approach for the vast majority of investors is to invest in a tracker fund or a wide spread of shares and hold them for the long term.”
Our philosophy in terms of retirement planning is similar: Select an appropriate range of investments that will mitigate as best as possible things that we don’t know are going to happen. In simple terms, not putting all your eggs in one basket trying to punt on a sure-fire winner.
Anyway, the truth is that we rarely even talk about investments with clients when we first meet them. We need to get to know what they like doing, what they want to do next in life and when they want to do it. It’s only then that we start to look at what they’ve got and how we can create a plan to help them get to where they want to be. But the plan won’t be based on trying to forecast quick wins, it will typically be diverse and sensible –aimed at mitigating the effect of potential economic hurricanes, rather than forecasting short term stock market winners.
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