Markets

How Would Knowing Tomorrow's News Today Affect Your Portfolio?

By Larry Swedroe

Updated on: June 3, 2009 / 9:55 AM EDT / MoneyWatch

For some investors, the equivalent of the "Midas touch" would be to have tomorrow's newspaper headlines today. With the ability to know the news (though not stock prices) with 100 percent certainty, you would think you could easily generate market-beating returns. But is that really the case?

Let's go back in time to March 31, 2009. With your newly acquired Midas touch, you can foresee that all of the following will have occurred.

North Korea not only tested an underground nuclear weapon and several ballistic missiles, but may do so again.
Nuclear power Pakistan became engaged in full-scale battles with the Taliban.
World trade was threatened by the outbreak of the swine flu (H1N1 virus).
The projections for the Federal budget deficit soared and with it the fear that rising inflation was inevitable.
China called for a new reserve currency to replace the dollar.
General Motors and Chrysler both declared bankruptcy.
The unemployment rate rose to 8.9 percent in April from 7.2 percent at the end of last year. It's expected to exceed 9 percent when the May data is released.
Oil prices rose to $68 per barrel, a 45 percent increase from $47 per barrel.
Gold increased from $917 to $976.
The 10-year Treasury bond rate rose from 2.7 percent to 3.7 percent.
The rate on 30-year residential mortgages rose to more than 5.5 percent, after falling below 5 percent earlier this year.

Individually, each of these items would be viewed as negative for the U.S. stock market. Collectively, it would seem they would surely send the market reeling. Even if you are the most disciplined buy-and-hold investor, your discipline would have been severely tested. You might have been strongly tempted to reduce your equity allocation or perhaps even get out of the market altogether.

Yet despite this tale of woe, the S&P 500 Index ended March at 798 and closed on June 1 at 943, an increase of 18 percent. Such an increase is nearly twice the historical annualized return of the S&P 500.

If you can't correctly forecast the market knowing the news in advance, how likely are you to forecast it correctly without a clear crystal ball? This just serves as a reminder of the fallacy of trying to use information that everyone has to predict the market's direction.