Every year, as the holidays roll around, a certain ritual repeats itself: the price forecasts of chief strategists, chief economists and fund managers for the coming year are published. For 2019, DWS, for example, is predicting a "seven to eight percent gain for the DAX". BayernLB, on the other hand, is more skeptical and issues a vague warning of a "clouding of the equity environment". The problem: these forecasts are either wrong – or, at best, right only by chance now and then. To see this, let's take a look at past forecasts.
The investment theme of 2018 was cryptocurrencies. Nothing seemed able to slow the unstoppable rise of Bitcoin, Ethereum and the rest. It only made sense that prices would keep climbing, right? That's certainly how "hedge fund legend" Michael Novogratz saw it, and he forecast a Bitcoin price of $40,000 and a tripling of Ethereum by the end of 2018. As we all know, things turned out differently: a Bitcoin currently costs just under $3,400, and Ethereum, far from tripling, lost 80% of its value.
What about stocks? For German equities, 2018 was an unhappy year; shortly before year-end the DAX was down 16%. Was that foreseen a year ago? You can find the old forecasts here. The result: of 32 institutions, only a single one predicted a negative year on the markets – with minus 5% instead of the actual minus 16%. All the others foresaw a clear gain. Citigroup and the distinguished Bank Sarasin at least got the number right, 16%, but got the sign wrong. Anyone who looks at all the forecasts on the website cited above will see that wrong forecasts are not the exception but the rule (it's exactly the same in the US). It's always the same pattern: the estimates mostly land somewhere between plus 5% and 10% and, in hindsight, turn out to be too low in good years. And when the market slumps, that isn't foreseen either.
How did the institutions justify their forecasts? "Low interest rates will probably prevent a correction," declared Christian Kahler, chief strategist at DZ Bank. "Booming corporate profits should continue to drive the German stock market next year as well," explained Deutsche Bank's chief investment strategist. You can still read it today on the WELT news site here.
As we know, things turned out differently – and for good reason: because these explanations are plausible only at the very first glance. In reality, even a halfway-functioning market prices in such information immediately, so prices rise at once rather than over the course of 2018. Or do these chief strategists believe that other market participants need many months longer to catch on to the "insights" just quoted? Someone is being taken for a fool here – either the fellow fund managers in the bank towers across the street, or the reader.
Invest instead of forecast!
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Anyone who spends time on stock market forecasts has, at the very least, given away their attention (which news sites can turn into hard cash through advertising), possibly spent some money on subscriptions or paid stock tips, and, in the worst case, lost a lot of money through a flawed investment strategy. A concrete example from 2018: Deutsche Bank saw "upside potential in financial stocks" and "still saw ground to make up here." Anyone who trusted this and invested in the two DAX banking stocks Deutsche Bank and Commerzbank at the start of 2018, however, owned only one DAX stock by year-end – and had halved their wealth.
So what's the story behind our 7.6% price forecast, which we sensationally announced in the headline? For one thing: apparently it worked, and you're reading this article. For another: even in our investment model, which aims to be as forecast-free as possible, we still need forecasts, because you can't do entirely without them. Our forecast is this: over the long-term average, stocks earn a higher return than bonds. Why do we believe that? Because it's plausible (more return for more risk) and because that has been the case over the past centuries. Accordingly, stocks should deliver an average return of just under 10% per year. In line with the state of research, we have currently revised this figure downward because of the generally low-return environment across all asset classes. And we make it very clear that our forecasts will never come true exactly. In fact, in our investment proposals we show likely stock movements of between minus 17% and plus 40% per year.
What does that mean for your investments? First and foremost: you should either ignore forecasts, or read them the way you read horoscopes – because they're fun, not because you believe them. And: market timing – that is, trying to beat the market by constantly getting in and out – doesn't work. Instead, it generates costs (or, from the financial industry's point of view, revenue) and carries the risk of missing the next recovery after you've stepped out. This investment mistake becomes especially common among investors right after bad years on the markets, as 2018 is set to be (we'll allow ourselves that forecast).
Price forecasts aren't always stated as bluntly as in the examples quoted above. Yet many "scientific" investment concepts also conceal forecasts, since ultimately it's always about beating the market through reshuffling within the portfolio. These are then often backed up by historical back-calculations that show a higher return for the strategy in question. But it's not without reason that every investment recommendation states: past performance is not a reliable indicator of future performance. Even with scientific studies that have been rigorously tested statistically, the takeaway in hindsight is often: the promised extra return fails to materialize. That's why quirion is extremely cautious with forecasts on this point too, and only implements what has proven itself over many decades and across different markets: namely, investing in low-valued companies and in small companies. Approaches that go beyond this destroy returns through high transaction costs and worsen diversification by concentrating on individual holdings.
For quirion, sensationalist price forecasts have entertainment value at best. Instead of taking our cues from them, we offer "the same procedure as every year": a low-cost, maximally diversified investment in the proven sources of return in the international markets.
