The folly of forecasting

Our brains crave predictability

Before explaining why we believe that market predictions are futile, it’s essential to understand why human beings are so attracted to these forecasts in the first place. Psychologists presume that we have an innate preference for certainty over uncertainty. When facing an unpredictable future, we crave clarity, assurances, and some sense of control, even if it is an illusion.

Making predictions, even inaccurate ones, helps satisfy
our brain’s desire for order and our inability to accept events as random. Having some story of what the future may hold makes us feel safer and less anxious. Of course, the realities of the complex world mean many things cannot be predicted accurately.

Nonetheless, pundits who boldly predict detailed market outcomes will always have an audience because of how our brains are wired. Admitting the future is ultimately unpredictable is unsatisfying. This is why the temptation to listen to market forecasts remains despite their terrible track record.

A dismal record

The fact that previous forecasts have widely missed the mark should give us further reason to pause. A year ago, many experts forecast a year of negative returns for global markets in 2023. We now know that many international markets experienced a year of high returns.

The difficulty of predicting short-term returns should not surprise us. Economies and markets function as “complex adaptive systems”. With so many variables interacting, predictions are difficult and black swan events are inevitable. Rather than get distracted by narratives offering false certainty, we are better off accepting uncertainty and controlling what we can control.

As Warren Buffett wisely stated, “Forecasts usually tell
us more about the forecaster than of the future.” In other words, the market predictions you hear are more useful for assessing the ego and attention-seeking motives of the pundits rather than divining anything about next year’s economy or market.

We suggest ignoring the predictions. However, should your brain still be tempted to latch onto this year’s forecasts, we encourage you to remember that:

1. No one knows what significant events will occur this
   year. The world is inherently unpredictable, as we’ve learned repeatedly. Even the most knowledgeable experts cannot reliably forecast political events, natural disasters, technological breakthroughs, or other surprises that can impact markets.
2. Even if pundits could predict major world events, no one can know precisely how irrational, emotional human beings will react. Markets are driven by fear, greed, and crowd psychology more than facts.

Navigating a complex world

As your advisers, we want to reassure you that we will never change your investment portfolio or long-term strategy based solely on market predictions or forecasts. We develop comprehensive plans tailored to your specific financial goals and ability to weather short-term declines rather than react to short-term noise. We only recommend adjustments when your circumstances or priorities shift, not when a pundit makes another faulty guess about next year’s market.

While we acknowledge the natural curiosity about market forecasts, we continue to focus on what has proven most effective: a solid, evidence-based investment strategy tied to the steady progress of human innovation and resilience. Despite inevitable fluctuations, the trajectory of progress and prosperity endures.

As we navigate 2024 together, our commitment remains steadfast—to adapt and refine your financial plan to meet evolving needs, goals, and aspirations, ensuring it remains robust no matter what the headline of the day might claim.

We invite you to reach out anytime to discuss your plan and reaffirm our shared commitment to a strategy transcending the yearly cycle of predictions and speculations. Here’s to
a year of remaining focused on what matters most on your financial journey.

Two of the best ways to save and invest (and preserve purchasing power) tax efficiently are via a pre-retirement vehicle such as a Retirement Annuity (RA) or a voluntary investment vehicle such as a Tax-Free Investment Plan (TFIP)

Ninety One’s Marc Lindley has written an excellent article which highlights some of the many benefits that RAs offer.

From the article, the below figure demonstrates the stark benefit of tax savings for RA investors comparing the same underlying fund return within an RA (red line) and outside an RA (charcoal line).

Source: Morningstar and Ninety One, performance NAV to NAV net of fees, as at 30.11.23. The illustration is based on the performance of Ninety One Opportunity A class: R10 000 per month invested in the RA, R5 500 per month in the discretionary investment, both escalating at 5% p.a. The assumption is that the R10 000 RA contribution falls within the investor’s allowable deduction for retirement fund contributions. It’s assumed that 20% of the return is of an income nature and taxed at 45% for the discretionary investment and that the annual interest exemption has been used elsewhere. No disposals during term shown.

In addition, Marc discussed how RAs provide considerable estate planning benefits as any lump sums or annuities received by dependents on death are exempt from estate duty, capital gains tax and executor’s fees.

Contact your Wealth Manager as soon as possible to discuss your unique investment needs.

PSG Wealth Melrose Arch team