Market forecast reliance should be limited

Market forecasts

Individuals should not lend too much weight to market forecasts to determine the asset allocations within their investment portfolios.

A leading economist has warned investors against adopting an over-reliance on market forecasts to determine their portfolio holdings at any given point in time.

AMP Capital head of investment strategy and chief economist Shane Oliver acknowledged market forecasts cannot be ignored altogether, but suggested their use should be kept in perspective and recognised for the purpose they are supposed to serve.

“Minimise the reliance on expert forecasts, particularly point forecasts and grand prognostications, when undertaking investment decisions. While point forecasts can help communicate a view, the real value in investment experts, the good ones at least, is to provide a better understanding of the issues around investing, a better understanding of what’s going on now and to put things in context so as to help avoid silly investment mistakes,” Oliver said.

Instead, he advised an adherence to some of the more fundamental investment principles, such as investing with a long-term view, would deliver better returns.

“The best way for most investors to avoid losing at investments is to invest for the long term. Get a long-term plan that suits your level of wealth, age, tolerance of volatility, et cetera, and stick to it,” he noted.

According to Oliver, having a disciplined investment process can offer a pathway to achieving better returns than market forecasts.

“If you are going to actively manage your investments, make sure you have a disciplined process. Ideally, this should rely on a wide range of indicators, such as valuation measures, like whether markets are expensive or cheap, indicators that relate to where we are in the economic and profit cycle, measures of liquidity or some guide to the flow of funds available to invest, measures of market sentiment and technical readings based on historic price patterns,” he noted.

“The key to having a disciplined process is to stick to it and let the ‘weight of indicators’ filter the information that swirls around investment markets so you are not distracted by the day-to-day soap opera engulfing them.

“Forecasting should not be central to your process.”

He said he preferred to focus on key themes rather than precise point forecasts.


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