The Insanity of ‘Predicting’ Markets

I have followed the recent commentary on the decision by the Bank of England to hold interest rates at their current lows yet again with some interest. Of particular note was not the decision to hold interest rates for the month of November (which was widely expected), but more the ‘forward guidance’ that we should not be expecting an interest rate rise for even longer than the markets had been expecting (perhaps as far as late 2016, or, dare I say it, early 2017).

As usual, various media outlets jumped on the story, commenting that even the Monetary Policy Committee or MPC (the people who actually make the decisions to change rates) actually had no idea when rates were going to rise. This came as no surprise to me at all. The MPC will make their decisions each month based on the information that they have available to them at the time. This information is constantly changing and evolving as world events, new economic reports and various geopolitical developments unfold. As such, it should come as no surprise that the people in charge of setting rates often change their minds because the information on which they base their decisions is changing constantly too.

Which brings me onto the topic of trying to predict markets. There are numerous industry ‘experts’ that voice their views on the future direction of markets and how the economy will evolve over time. Given that interest rates are such a key component of the economic activity of a country, they tend to feature quite heavily in the ‘experts’ analysis.

This begs an interesting question to me … If the people who actually have full control over setting rates have no idea when they are going to change, how do the rest of us have any hope and more importantly, how accurate can any ‘prediction’ ever be.

I recently reviewed an academic study on this topic and the results were fairly unsurprising. When we look back on previous predictions made by ‘experts’ in the financial field and see if they came true, you could just as well flip a coin. Approximately 50% of them were correct and 50% incorrect.

So which will it be, heads or tails?

We feel that a far better approach is to design a strong long-term asset allocation and stick to it, rather than trying to ‘time’ or ‘beat’ the markets because, surely if the insiders don’t know what’s going to happen, the rest of us have no hope at all.