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2019 | The Forecast Fallacy

2019 | The Forecast Fallacy

  • Monday 23 December 2019


At this time of year I enjoy nothing more than opening my email archive and pulling out the communications from January 2019 to see what the ‘experts’ were forecasting for the year ahead. You may remember that December 2018 was an atrocious month for investment markets, with drops of 10%+ in some places. As a result it should be no surprise that the general tone of content that followed was extremely negative, with most investment managers predicting the start of a ‘bull market’ if not global recession.


So what happened?


Well markets have absolutely shot the lights out and we looked at returns in the ranges of 5% for Europe to over 20% in the U.S. Our client portfolios have grown significantly and we’re delighted of the impact that this growth is having on our client’s Financial Goals – either allowing for greater aspirations or setting a solid foundation that will give comfort and security for the years ahead.

Of course if we try to communicate one thing to our investment clients it’s the oldest adage around – ‘past performance is no guide to future expectations’ – and yet I expect my inbox to fill up in the coming weeks with more expert commentary for 2020. I’ll keep them safe for this time next year!


The Random Walk Theory

Predicting future market outcome is the ultimate goal of all Active Fund Managers, who set their bets early and hope they come true. This can involve picking a particular company or share, or even sectors and geographical areas. Even in these broader fields, where you would expect some consistency or predictability, you get neither.

This is best represented in the following diagram, which shows the performance of various ‘developed’ markets for almost two decades. It’s a very busy picture and your goal is to discern any possible pattern you can from it:



Well, find anything you’d be willing to bet on?

Of course you didn’t. That’s because there is no pattern. The performance of any market in a particular year has absolutely no bearing on the performance of the same market in the following year. In total, the entire diagram is a picture of randomness, and this is what we call ‘Random Walk Theory’. It means that what happened before has little or no impact on what happens later, which is something we learned to our benefit in 2019.

That’s not to say there are no patterns in investing over time of course. What the data shows is that the higher your quota in the equity market (as opposed to Fixed Income assets like Govt. Bonds) the better your investment will do over time. That’s been proven over and over again, but it requires you to buy the whole market and not just a subset – whether region, sector or individual company.

Curran Futures believe in passive, low cost market investments and our portfolios are testament to a rigorous academic approach. Come talk to us today about investing for a successful outcome

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