Chart of the week

A postmortem on predictions

An examination of the carcass of 2022 market predictions reveals an ugly picture. Of course predictions will rarely be precisely correct, but in this case the average predictions were directionally incorrect and the magnitude of change wasn’t in the ballpark. 

The proliferation of financial media has infected the minds of many investors with dangerous, short-term, predictive thinking that stokes innate behavioral biases. If the well-intentioned, seasoned professional strategists whose work is represented in this chart are so wrong, it’s clearly an uphill battle to “invest” based on near-term predictions. 

While the predictions will continue, we should see them for what they are and move away from predictions and towards preparation. The past few years (and this chart) demonstrate that the future is unknown and unknowable. So how can you construct a portfolio to be prepared to weather a range of potential outcomes? Asset allocation frameworks like risk parity, portfolio structural shifts through tactics like portable alpha or return stacking, strategies like trend following, and real assets like gold can go a long way to make a portfolio more robust to whatever the future may hold.

If your investment strategy is predicated on near term (~1yr) predictions, godspeed.

For the CNBC crowd - check out the inverse Jim Cramer tracker. Perhaps the best way to generate alpha is to just do the opposite of what people raving about their predictions on TV are doing.

Data Source - Meredith Wealth Planning