I am not sure what our fascination with predictions is all about. Whether it is political elections, sports, or the financial markets, everyone seems to be willing to stop and listen to someone willing to make a prediction. Rarely do we ever go back to evaluate how those predictions pan out? Regarding investment predictions, every once and awhile, I like to go back and check the accuracy of those prognosticators against the investment markets to see how they have held up. One of the most famous is Jeremy Grantham, founder of GMO, a multi-billion dollar asset management company. He periodically published a 7-year market prediction and gained quite a bit of notoriety for accurately predicting much of the investment returns in the early part of the 1990s. As we approach the end of his 7-year forecast from June 30, 2008, I thought it would be helpful to evaluate his predictions (caveat- the index returns go through 5/31 while the GMO forecast is through 6/30):
| Asset Class | Index | GMO Forecast | Actual Return |
|---|---|---|---|
| US Large Cap Stocks | S&P 500 | 3.2% | 9.85% |
| US Small-Cap Stocks | Russell 2000 | 2.1% | 10.46% |
| Int’l Large-Cap Stocks | MSCI EAFE | 5.8% | 2.42% |
| Int’l Small-Cap Stocks | MSCI EAFE Small | 6.2% | 5.69% |
| US REITs | DJ Select REIT | 2.7% | 8.4% |
| Emerging Mkt Stocks | MSCI Emerging Mkts | 6.8% | 1.25% |
So, if you had taken GMO’s advice and overweighted the areas they predicted would perform the best, you would have put most of your money in emerging market stocks and international stocks. The asset classes that predicted the worst performance (US stocks and REITs) had been the best places to invest. The point is, no one has a crystal ball. Those that have been right in the past have no better chance of being right in the future. Once you realize this, you’ll be a much better investor, immune from the siren song of predictions.
