Seasonal madness is soon upon us. No, not the Christmas spending splurge, but the time when City strategists are asked for their market forecasts for the next 12 months. But I never take part. Why not? Because frankly I don’t have a clue as to what the FTSE100 will do in the next 12 months and I’m willing to admit it.
Such an admission is rare. Strategists and fund managers are paid sackloads of cash to have a view, so have one they must. And their year-end FTSE100 target can’t just be a number plucked from the air. There has to be some heavy number-crunching to justify their opinion.
But the danger with all that spurious research is that it creates too much confidence in market targets. It lulls non-expert clients of the fund-management industry into believing forecasts of which they should be deeply sceptical. In reality, those ‘City experts’, like me, haven’t a clue.
The media is complicit too. Presenters on the US business tele-vision network CNBC are always asking guests whether the market is going up or down. ‘How can our viewers make money?’ I suggest the best way for them to make money is to turn to a different station. If there is one thing you should learn about managing your money it’s this: timing when to buy and sell a market is almost impossible, so don’t bother trying.
To prove my point I asked the low-cost US fund manager Vanguard to run some numbers for me. Suppose on1 January 1986 I had £100 to invest. Now assume I have perfect market timing: I can predict whether the market is going up or down each day. I would buy shares every day the stock market rose, and sell whenever I foresaw it falling. Assuming I invested in the FTSE All Share index how much would that £100 be worth now?
Most people don’t believe the answer. Even Vanguard didn’t to begin with. But assuming I was Miss Perfect Timing — the ideal CNBC guest — then £100 would have grown over almost 30 years to £274,270,711,172,170. Blimey! I had to look that number up to find out how to say it: over £274 trillion, or six times larger than the entire world’s GDP. No fund manager or hedge-fund genius has come close to achieving a tiny fraction of that perform-ance. For all the boasting, no one can time a market day by day. Of course cruder long-term market timing is possible, and may be profitable. But most don’t do it because they don’t have the psychological toughness.
Here’s an example. During the eurozone crisis in 2011, European stock markets sank to single-digit price-earnings ratios, which usually signal that it’s time to buy. But the eurozone was falling apart, Greece was going bust and every news bulletin was laden with doom. For most of us, buying European shares at that time was unthinkable.
But if you had the nerve, buying European shares at the height of the crisis was a profitable move, as was buying America’s stock market at the height of its financial meltdown. In the words of legendary investor Warren Buffett: ‘Be fearful when others are greedy and greedy when others are fearful.’ To make money, go against the prevailing mood. Yet time and time again, the investing public do the opposite. They sell when the market is falling and buy when stocks are expensive.
Even if you have the mental toughness to ignore the crowd, it may take years for you to be proved right. A market can remain cheap or expensive for a long time. Even brilliant investors who spot once-in-a-lifetime buying opportunities do not know exactly when the market will go up, only that it should do so at some point.
As a self-aware ‘financial expert’ I know I can’t predict markets. Better to be patient, save as much as I can, benefit from compounding returns, and ignore short-term volatility. Thus my strategy for my own retirement pot is to invest a fixed amount each month into a low-cost, tax-efficient pension fund or Isa. This has the advantage of buying more shares when the market is low and fewer when it’s high, a technique called ‘dollar cost averaging’.
Meanwhile, those who got it right once will crow about their past predictive perfection, and strive to do it again. But the Vanguard number shows that if it were really possible to time markets perfectly and consistently, our City experts would already be richer than Croesus.