Just ignore market and economic forecasts

Stocks are about to plunge!

Before you panic, this isn't my forecast and it wasn't made today. That was the warning from Wells Fargo strategist Gina Martin Adams on September 20, 2013.

The S&P 500 index had closed the prior day at 1,726, and Adams was predicting a significant downturn in the market. Specifically, she forecast that the S&P 500 would close out 2013 at a meager 1,440.

In fact, she had been bearish all year. And up to that point, the market had resolutely ignored her as the S&P 500 advanced steadily from its 2012 close of 1,426. After her September prediction, the market continued to ignore her call for a major correction and actually closed the year up at 1,848 -- 28 percent higher than her forecast.

Adams warned: "Unless bonds can actually rally substantially with the so-called Fed bid, and the Fed is able to manipulate yields significantly lower, the damage has been done, and I think the cat is quite frankly out of the bag." Bonds didn't rally substantially. The 10-year Treasury yield is only about 10 basis points lower now than it was at the time of her prediction.

The market, however, did continue to rally, defying Adams and many other gurus who warned about its "excessive valuation." The S&P 500 stood at 1,985 as we celebrated the Fourth of July.

One of my favorite pastimes is to hold both the financial media and economic or market gurus accountable for their forecasts. They certainly aren't going to hold themselves accountable because that would ruin the game. As columnist Jason Zweig at The Wall Street Journal noted: "Whenever some analyst seems to know what he's talking about, remember that pigs will fly before he'll ever release a full list of his past forecasts, including the bloopers."

Holding forecasters accountable is why, on occasion, I'll add an especially dramatic forecast to my files. I shared this particular one with you today not to pick on Adams, but to provide yet another reminder of why you should ignore all economic and market forecasts -- regardless of the credentials or experience of the person making the forecast or offering advice, and no matter how cogently those arguments are made.

It's also important to remember that most of us are biased by our own opinions. We exhibit confirmation bias, which is the tendency to give more weight to opinions that agree with our own and dismiss opinions that disagree. If you were worried about the market going down in September 2013, you were probably more likely to let Adams' forecast affect your investment decisions.

The research on the accuracy of economic and market predictions clearly demonstrates that there are no good forecasters. In fact, the research shows the only thing that correlates with accuracy is fame, and the correlation is negative. The more famous the forecaster, the less accurate the forecast tends to be.

That's why whenever I'm asked about my outlook for the economy or the market, my response is the same: "My crystal ball is always cloudy." I don't make forecasts. Investors should learn what Warren Buffett knows: A market forecast tells you nothing about where the market is going but a lot about the person doing the forecast.

Unfortunately, most investors do pay attention to economic and market forecasts, leading them to act when inaction is in their best interests. Giving credence to what forecasters have to say is playing a loser's game because you're spending time trying to control the one thing we cannot control -- future outcomes.

Instead, you should be spending time on the things you can control, such as setting the amount of risk you want or need to take, diversifying the risks you choose to take as much as possible and keeping costs low and tax efficiency high. That's the way to play the winner's game.

  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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