Gold Core

Our predictions for 2010

Published by Marc Westlake under News |

This time of year typically sees the financial pages of newspapers full of predictions about the year ahead.

We've lost count of the number of occasions last year we have been asked whether "now" is the right time to buy or sell.

The bad news is that, unfortunately, it is extremely difficult to predict where different asset classes will go from here; of course this will not stop many industry experts from trying. In the words of renowned economist, JK Galbraith, "We have two classes of forecasters; those who don’t know and those who don’t know they don’t know."

The last two years have shown us that equities and property are probably more risky than many investors realised and certainly are if investors are not prepared to be patient, or get worried out of a sensible strategy by market noise.

The mundane and sadly prosaic answer to the original question is that if you have a properly constructed and diversified multi asset class portfolio, then you should keep your head down and ride out the troughs, as you do the peaks. The point being that if your portfolio was correct for you a year ago or six months ago, then it probably still is now.

We have never come across anyone who can predict the future, and especially the tops and bottoms in financial markets. Even assuming you could assimilate all the millions of factors that are available, the most rational of predictions can still get wiped out by a stampede of, often irrational, sentiment from investors, whose mania and mob mentality can lead to large swings from depression to over confidence.
Studies in the US often show the incredible fact that average investor returns, over time, are rarely in the same ballpark as the market or even the average mutual fund. The obvious conclusion is that investors are consistently interfering with their portfolios and following the observed behavioural issue of buying high and selling low.

It was only recently that investors were buying commercial property funds in vast quantities, after several years of strong and sustained performance. Now we are facing an entirely different landscape with sentiment being one of 'doom and gloom', and many investors holding secure cash deposit funds.
Trading a portfolio when uncertainty is great and emotions are running high seems destined to lead to disappointment. Instead, consistently and systematically rebalancing a multi asset class portfolio back to its original target weights, by consistently taking "profits" out of the areas that have done well, and redirecting them into asset classes that have lagged and hence are "cheaper" in relative terms, essentially averages down your relative cost price in that asset class. One manages to avoid the buy high and sell low issues that tend to plague the average retail investor.

The good news is that you don't need to be able to predict the future or time market peaks and troughs, to be able to invest productively. Risk can be diversified, especially via multi asset class investing, which itself is based upon correlations, or the way asset classes move relative to one another. Critics say that correlations can be unstable, and this is sometimes true of the short term, but over any meaningful investment period they are actually remarkably robust.

So, investors are able to create a portfolio that blends different asset classes that should shield investors from large lurches in the markets, and without the need for subjective interference, which so often can go wrong.

Oh, and our prediction for 2010……….. is that many of the predictions made by so-called experts for the year ahead will fail to materialize and that those that are correct will be no more than we would expect from pure random chance.