It is that time of year when forecasts abound. There are a lot of experts telling us what they expect the market to do in 2025. The most popular forecast is how the stock market will perform in 2025.
We love forecasts – we eat them up. Our brain may contain a lot of gray matter, but it hates gray areas. So, whenever we hear a forecast, especially if it is given confidently with some “evidence”, we tend to take them at face value. But we should ask questions.
For example, we should ask ourselves whether a given forecast is likely to be accurate and reliable. Forecasting the sun rising tomorrow is one thing. Forecasting how the stock market will perform next year? Unfortunately, the evidence strongly indicates that market forecasts are not accurate and therefore not reliable.
A History of Forecasting Follies
In December 2023, many of the top Wall Street firms put forth their 2024 forecast. Several of the firms were predicting a loss for the market. The forecasts were off by between 10% and 43%.
For 2023, Wall Street firms did a bit better. They were “only” off between 6% and 30%.
And for 2022, a survey of 16 Wall Street Firms had forecasts between a loss of 3% and gain of 19%. That year the market lost 19%. The forecasts were off by 16% - 36%.
With that information, why do we listen to forecasts?
Ignoring Forecasts
Forecasts are notoriously and consistently wrong…sometimes by a lot! It is best to view forecasts as “For Entertainment Purposes Only.” While our brain may be naturally attracted to forecasts, it is essential that our investment decisions are driven by our plan and not by unreliable market forecasts.
©The Behavioral Finance Network