Should you listen to Bill Gross?

(MoneyWatch) When a well-known financial figure makes a big prediction or says something particularly stunning, you should always wonder if it's information worth acting on. And in most cases, such as the most recent example, the answer is no.

Bill Gross, PIMCO's founder and managing director, caused a stir by writing that stocks have a dismal long-term future. Given Gross's outstanding reputation, I fully expected to receive calls and e-mails asking me to comment about this forecast of doom and gloom. And I wasn't disappointed.

Here's the way I approach predictions such as this one. My first response is to ask: "Why would anyone care what financial people such as Bill Gross says about stock returns, when the evidence shows that there are no good forecasters?" As Warren Buffett noted: "A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting."

My next response is to see if it's possible that the predictor is an exception to the rule. Has he or she made big predictions and been right, and if so, how frequently? In Gross's case, he made a similar forecast back in 2002. On Sept. 3 of that year, the Dow Jones Industrial Average stood at about 8,300, and the S&P 500 Index was at 878. Gross said that "We already 'know' bonds are going to yield/return 5 percent or so over the next umptyump years. How about asking the same question for stocks? Afraid of the answer? My message is as follows: Stocks stink and will continue to do so until they're priced appropriately, probably somewhere about Dow 5,000, S&P 650 and NASDAQ God knows where."

One year later, the Dow crossed the 9,500 mark (or 90 percent higher than Gross's prediction), and the S&P 500 closed at just over 1,000 (more than 50 percent higher than Gross's prediction). For the one-, two-, three-, four- and five-year periods beginning September 2002, the S&P 500 returned 12.1 percent, 11.8 percent, 12.0 percent, 11.2 percent and 12.0 percent, respectively. (Granted, the S&P did hit 666 in 2009, but two years later it had doubled.)

Let's not forget his prediction just over a year ago, when the "bond king" announced that PIMCO had removed government debt from its flagship fund (PTTRX), saying that bond levels had reached unsustainably low levels given the scale of government debt obligations and the Federal Reserve's quantitative easing program. By August 2011, Gross admitted he had made a big mistake, as interest rates continue to fall.

Before rushing to make changes to your portfolio based on what a financial expert has said, first ask yourself how sure you are of this person's forecast. Then see how accurate this person has been. Finally, see how far off-course from your investment plan you would go by acting on the advice and what the cost of being wrong would be.

Image courtesy of Flickr user 401(K) 2012.