Stock Market Investing is Simple .... Don't Predict the Short Term ... Invest in Stocks and Be Happy Over the Long Term

It's that time of year when stock market predictions by the so-called "experts" for the new year are taking place.

My advice for you is to ignore the experts and the short term annual calendar and take the time to understand the overwhelmingly clear long term benefits of investing in stocks.

In the short term, prices will fluctuate, of course, and they often go down, sometimes quickly and dramatically.

In the long term, however, stock prices will increase at a rate considerably faster than  inflation and at a rate which surpasses such alternatives as money market funds, bonds, real estate, gold and other investments.

So if you are using a calendar when investing, use one measured in years and not days, weeks or even 12 months.

And if you are young enough to have decades left before retiring, invest as much as you can as early as you can and as consistently as you can, and don't worry about the daily or even annual fluctuations in prices.

When they "go on sale," you can get more bang for your long term investment buck.

Why Market Forecasts Are So Bad concludes correctly that annual forecasts by the so-called experts are often worse than random guesses:

"The oracles known as Wall Street strategists have spoken: The S&P 500 will rise 6.4% by the end of next year. But the evidence shows you'd do just as well guessing yourself.

 

It isn't supposed to be that way. Strategists use complex models to forecast earnings growth, price/earnings ratios and other market-driving factors. In the 21st century, apparently, that effort has been for naught.

 

Take the predictions that strategists made in December 2012, attempting to forecast the S&P 500 this year.

Research firm Birinyi Associates collected such projections by 11 strategists from Wall Street's largest firms . . . . BAC in Your Value Your Change Short position On average, the analysts thought the S&P 500 would rise 8.2% in 2013. The S&P 500 has actually risen 27.5% this year through Friday, not including dividends—a difference of 19.3 percentage points.

 

To put that in perspective, let's say you pinned a list of all the annual S&P 500 percentage changes since 1929 on a wall and blindly threw a dart at it.

 

More than half the time, the number you landed on would have come closer to 2013's actual price change than the analyst consensus for the year, a Wall Street Journal analysis shows, based on data from Birinyi and historical returns.

 

Since 2000, analysts have also done worse than the dart thrower in 2001, 2002 and 2008. Winning 10 out of 14 times wouldn't be so bad—were it not against such a mindless opponent.

 

Forecasting stock returns a year in advance is exceedingly difficult. Often, failing to foresee one big event, such as the Federal Reserve's decision not to slow its bond-buying program in September, can mean the difference between being close or whiffing, says Tobias Levkovich, chief U.S. equity strategist at Citigroup.                                           C in Your Value Your Change Short position

 

Last December, Mr. Levkovich thought the S&P would close at 1615 this year. That made him the most accurate of strategists Birinyi tracks, but the estimate is still on track to be much too low. On Friday, the S&P 500 closed at 1818.32.

 

Mr. Levkovich says he thinks Congress's fiscal progress has also been an unexpected positive for the market. . . .

 

Say that at the end of each year, you found the median annual change in the S&P 500 since 1929 and used that as your guess for the next year's price change. For example, in 2006, your guess would have been 9.06%—the median price change between 1929 and 2005.

 

That method would have beaten the strategists half the time since 2000, according to a Wall Street Journal analysis. . . .

 

So what's the problem?

 

For one, since 2000 the strategists as a group have never forecast a drop in stocks. The upward bias makes some sense; stocks have risen in 55 of 85 years going back to 1929.

 

But the optimism could also reflect Wall Street's tendency to be forgiving of bullish strategists who end up being wrong, says Citigroup's Mr. Levkovich.

 

He says a Wall Street friend once gave him some advice: "If you're a bull and you're wrong, you're forgiven. If you're a bull and you're right, they love you. If you're a bear and you're right, you're respected. If you're a bear and you're wrong, you're fired."

 

Mr. Levkovich, who thinks the S&P will rise to 1900 next year, says that he would make a negative forecast if the circumstances warranted it.

 

But the larger issue might be simpler: Forecasting the stock market accurately is extremely difficult, if not impossible, says Masako Darrough, an accounting professor at Baruch College who has researched biases in analysts' earnings forecasts.

 

Rather than invest more or less in stocks based on strategist calls, she says most investors are better off sticking with their usual allocations and, for planning purposes, to assume that stocks over the long run will rise at their usual pace.

 

Since 1926, large-company stocks have had an average annual total return of 9.8% including dividends ....                      MORN in Your Value Your Change Short position

 

Cut strategists who must make projections some slack, but don't bet on their accuracy either."

 

Summing Up

 

My short term crystal ball says that stocks will appreciate by 10% or more in 2014 and that the S&P 500 has a great chance to surpass 2,000. That makes me an unmitigated bull, I guess.

 

However, my short term crystal ball also says that stocks will probably fall sometime during the year by 5%-10% and scare many people out of the market. So if you are a "Nervous Nellie," either don't watch or stay away from investing in stocks.

 

But if you stay away from long term saving and stock investing, you'll be doing the wrong thing for yourself and your family.

 

My long term crystal ball, based on more than 40 years of personal investing, says that stocks will by a wide margin outperform other forms of investment over time. They always have and always will.

 

As a result, stocks are absolutely the best place to put your savings for the long haul.

 

And very probably in 2014 as well.

 

More to come.

 

Thanks. Bob.