Over the past few weeks investors have been inundated by a parade of prognostications from financial soothsayers who claim to have a crystal-ball view of what interest rates and the markets will do in the coming year. Here’s why you’re better off simply ignoring those predictions.
Excuse me if I’m a bit skeptical when it comes to the annual ritual of predicting how the financial markets will fare and what investors should do to capitalize on them in the coming year. Not surprisingly given the Fed’s recent decision to boost the target federal funds rate to between 0.25% and 0.5%, the future path of interest rates and the effect that might have on borrowing, saving and investing are central to many predictions. But when you’ve been around this prognostication game for more than 30 years as I have, you can’t help but realize that however well-intentioned they may be and however authoritative they may sound, the overwhelming majority of financial predictions are guesstimates with dubious practical value.
Last year, for example, two major financial websites that I won’t embarrass by naming ran stories that predicted (or strongly implied) that 2015 would be a solid year for the stock market with gains in the high-single to low-double digits. I suppose there’s still time for those predictions to pan out, but barring a stirring rally in the final days of the year that seems unlikely.
No doubt there are also some seers whose forecasts were right on for the past year and may even prove to be correct next year, at least on some counts. But the point is that when there are so many predictions being tossed around it’s virtually impossible to know which are likely to be on target and which aren’t. And even if you do somehow home in on those that turn out to be right, how do you know whether it was correct due to true insight or dumb luck? You can’t, and it would be a huge waste of time trying to sort it all out.
I’m not suggesting you shouldn’t keep abreast of financial market news. In the case of interest rates, for example, you’ll want to consider how rising rates might affect any debt you have or are thinking of taking on, such as a mortgage, home equity line of credit or reverse mortgage. And you’ll also want to see how the stock and bond markets respond in the months ahead to the most recent and any future rate hikes. But you certainly shouldn’t be overhauling your investing strategy for retirement and other goals on the basis of some pundit or another’s annual guess about what lies ahead for the market or the economy.
Instead, to make sure you’re well-positioned for the coming year and beyond, focus on what really matters. So what really matters?
Having a plan matters. If you’re trying to achieve goals like building a nest egg for retirement or ensuring that you don’t outlive your savings, you shouldn’t be making investing moves and other decisions on a year-to-year basis. You need a coherent long-term plan. Central to that plan is figuring out the percentage of salary you need to save during your career and, once you’ve retired, how much you can reasonably expect to draw from your nest egg without running through your money too soon.
Another important component: developing an investing strategy that gives you a good shot at getting the returns you need to reach your goals without taking more risk than you can handle. (This risk-tolerance/asset allocation tool can help with that.) The point, though, is that just as you need to set a course when undertaking any long journey, you need a road map to reach your financial goals.
Maintaining a diversified portfolio matters. Many year-ahead forecasts presume to know not only how the overall stock and bond markets will do, but which sectors to favor or avoid—financials or telecom, etc. in the stock market and short- vs. long maturities, Treasuries vs. corporates, etc. in the bond market. But while betting your portfolio into a few sectors could pay off if you get it right, you can end up with subpar returns or even outright losses if you don’t.
Which is why you get a better tradeoff between risk and return by settling on a stocks-bonds allocation that makes sense given your risk tolerance and how long you plan to have your dough invested, and then diversifying broadly in both stocks (large and small companies, growth and value) and bonds (where generally you want to stay toward the short to intermediate end of the maturity range and stick mostly to Treasuries and investment-grade corporates). You can achieve a diversified mix of stocks and bonds in many ways. But if you want to do so easily and efficiently you should consider getting your stock exposure from a total stock market index fund or ETF and your bond exposure from a total bond market index fund.
Discipline matters. There’s a temptation, especially when experts are talking as if they know which investments will outperform in the coming year, to overhaul your investing strategy in attempt to capitalize on winners and avoid losers. But that’s the very time when it’s most important not to turn your investing strategy into a short-term guessing game and stick instead to a diversified portfolio that can thrive over the long haul and that reflects the level of risk you’re willing to take.
Similarly, at a time when Wall Street marketing departments are constantly touting some new “alternative” investment in the name of diversity, it’s important to remember that you don’t need to invest in an ever-expanding number of arcane funds or ETFs to reap the benefits of diversification. Simpler is better. Indeed, if you continually add more and more investments to your portfolio, the more likely you’ll end up “di-worse-ifying” rather than diversifying.
Trimming costs matters. It’s understandable that returns are the focus of most predictions for the year ahead. But even though they rarely get a mention, investments costs are equally, if not more, important. The reason: over the course of your career and retirement, the more you hold the line on investment fees (as well being careful about what you pay for financial advice), the larger your nest egg will likely be and the longer it will support you in retirement.
Follow-up matters. While you don’t want to make dramatic changes to your investing and planning strategy every year, you do need to do periodic re-assessments to ensure you’re still making progress toward your goals. So in the case of your investments, you’ll want to do a portfolio check-up preferably before the end of the year to assure your stocks-bonds mix is still in synch with your risk tolerance. As part of that review, you may also want to rebalance and maybe even sell shares in taxable accounts to generate realized capital losses that can be applied against realized capital gains and possibly even regular income.
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To make sure you’re still on track for retirement, you can plug such information as how much you’re saving each year, how much you have socked away already and how you’re investing your savings into a retirement income calculator. If you find that you’re falling behind, you can see how saving more, staying on the job a few more years or perhaps spending less in retirement might be able to improve your retirement outlook.
Bottom line: Financial pros’ prognostications and predictions may be fine for casual reading or entertainment value. But when it comes to actually investing your money and planning your future, you’ll be better off if you concentrate on what really counts.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire.