Predicting the Future is Hard, as These Forecasters Show

(MoneyWatch)  As we get ready to move into a new decade, any number of experts is preparing their lists of investment styles and strategies that they expect will do well over the next ten years. As interesting as their thoughts and opinions are, it might be useful to take a look at how some prognosticators fared with their predictions for the decade just passed.

The USA Today's John Waggoner is a fine columnist who typically dispenses excellent investment advice. But he missed the mark in a late-1999 column in which he attempted to predict which actively managed equity funds would be strong performers in the first decade of the new millennium. Waggoner wrote that "hitch(ing) your wagon to whatever mutual fund has performed best in the past decade ... may not be such a bad idea ... (T)he funds that did best in the 1990s will probably do well in the coming decade."

So how did that work out? Not so hot, actually.

Most investors know that it's never a good idea to base your investment decisions solely on past performance, but that was a particularly bad decision in late-1999, when we were at the absolute apex of the technology stock bubble.

Given Waggoner's premise that the past decade's winners would repeat, it's unsurprising that all of his fund picks were neck deep in the tech bubble. Nine of the ten were growth stock funds that had earned their stellar records by owning the stocks that led the market to its lofty peak. (The tenth was a large-cap blend fund.)

And their records were indeed impressive, outperforming their benchmarks by more than six percentage points annually during the 1990s. Their average annual return of 25.6 percent would have turned a dollar into $9.75 by the end of the period.

Unfortunately, the strategies that served those funds so well in the 1990s didn't work out in the 2000s. The average fund on Waggoner's list lost 2.2 percent in the decade ended November 2009. And those former leaders turned into laggards, trailing their benchmarks by 1.6 percent annually.

The Total Stock Market Index's return in that period was 0.3 percent -- hardly a rich return by the market's historical standards, but each $1 in the Total Stock Market would have been worth $1.03 today, a 29 percent improvement over the $0.80 that investors in Waggoner's funds would have.

Waggoner was hardly alone in having his judgment clouded by the bubble. In February 2000, Money magazine published an article extolling eleven equity fund managers who would "bust their benchmarks in the decade to come."

So how did these benchmark busters do?

Ten years later, eight of those managers no longer run the funds that Money recommended. And in the decade ended November 2009, those whose managers had departed weren't busting any benchmarks, they were being bludgeoned by them, trailing by 2.6 percent annually. The funds run by the three managers remained at the helm performed much better, outperforming their benchmarks by 0.4 percent.

As a group, Money's star managers lagged the overall market by 1.2 percent per year, producing an annual return of -0.9 percent versus the Total Stock Market's 0.3 percent return.

Of course, it's easy to look back and find decade-old predictions that seem silly with the benefit of hindsight. And that's precisely the point. As we marinate in the information that piles up around us day after day, it's difficult to envision a way in which the future will look much different than the present. And so investors focus their search on those investment professionals who, by skill or by luck, have succeeded under the current conditions without giving a lot of thought to how they'll fare when the environment inevitably shifts.

So as we despair about a weak dollar, amaze at the ascent of gold, and question the long-term role of stocks, remember that just ten years from now, a strategy that is built upon the belief that the current conditions will continue unabated -- and ignores the near-certainty that the coming years will bring a host of surprises -- will seem as silly as the misplaced predictions of 1999 do today.