Thoughts on Market Forecasts

photo by bratha

Written by Dave Young, President of Paragon

Clients who have been with us for years know we are not big fans of market forecasts, whether they are made by us or anyone else.

Let me tell you why I believe so strongly.

There's no shortage of self-proclaimed market prophets. You can find them in investment magazines, newspapers or CNBC. Although they can be entertaining, they provide no real investment value. They do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.

The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck maybe half of these predictions are proven right-meaning at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. The numerous forecasts that do not pan out (and those many investors who are financially hurt by them) are never spoken of again.

In truth, you're much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least they inflict less damage when they're wrong.

So if forecasts are a waste of time, what does work? After 23 years of managing money, I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy-even the gut feelings of so-called experts.

Oftentimes, successful investing requires you to act in a way that is contrary to what you "feel" is right. For example, several of our models measure the overall optimism or pessimism in the investing public. When optimism is high we know there is a lot of risk in the market and it's likely that the market will decline. Likewise, when optimism is low and most investors think things are really bad, that is usually a great time to invest. This pattern has repeated itself for years.

All of our investment decisions at Paragon are based on solid, proven models, not hunches. Our portfolio allocation models tell us how much we should be invested based on measured risk in the market. We run the models daily to determine the most effective percentages of investments and cash holdings.

Once we are in the market, our portfolio focus models tell us where we should be invested. We constantly track all areas of the equity markets on both a macro scale (small cap, mild cap, large cap, value, growth, international and emerging markets) and a micro scale (individual industries, sectors and countries).

The bottom line for Paragon Wealth Management's clients is that they can be confident that their portfolio isn't being managed by some celebrity market fortuneteller. Our quantitative models enable us to impartially measure what is actually happening in the market and how much risk there is at any point in time. We constantly evaluate the models to determine how effectively they are working. In my opinion, this is one of the best ways to invest for long-term success.

The moral of the story is that forecasts make interesting conversation and trivia. Just don't use them to try to make money.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.