How did I do on my investment predictions for 2014?
It’s very easy for people to make predictions about the future, especially when they don’t look back to see how they did. At the beginning of the year, I wrote a piece titled “Potential investment themes for 2014.” Below is a recap of those themes, along with a report card on how I did.
(Disclaimer: I’m not good at making predictions; the reality is that no one successfully predicts anything on a consistent basis, let alone is able to profit from it. Most folks who are perceived as smart are often just lucky or have said the same thing for five, 10, or 20 years and were finally able to be right. As they say, “Being early is the same as being wrong.” Feel free to agree or disagree and opine intelligently why.)
1. Interest rates may not rise as much as people think, and they may even fall.
A+: I nailed this one. Was I really that smart? No. I just took the other side of the most bearish trade I’ve seen in a long time. Eventually, when everyone is bearish, you run out of sellers.
2. However, as I mentioned last year, as long as interest rates stay low, investors will continue to look for yield and higher returns elsewhere.
A: Again, another big one. Basically, most income-producing investments had an awesome year, and folks continue to go after yield. This was bound to work out if I was right about No. 1. Note that people will dial down or abandon the yield chase if yields on Treasuries start to rise.
3. The U.S. stock markets and other developed stock markets may pull back.
B-: If you measure January to December, I failed on this prediction with respect to the U.S. markets but aced it regarding international markets; although international, emerging, and U.S. markets all pulled back to points of relatively poor returns at one point (fall of this year).
4. The least-loved investments of 2013 may be some of the most-loved by the end of 2014.
C: I’d say I was pretty wrong with regard to the U.S. markets, since they were among the most-loved in 2013 and were again in 2014, and international markets continued to disappoint. That said, Treasuries were not very loved going into 2014, and longer-term Treasuries actually had better returns than U.S. stocks, especially on a risk-adjusted basis.
I mentioned last year that I would never bet the farm on this idea, but in a disciplined, rebalanced, diversified portfolio, you may be able to passively buy some more of these least-loved investments and sell a portion of the most-loved, allowing you to avoid riding with the herd and hopefully enhance your long-term returns. Over time, the herd does a horrible job of enhancing returns.
5. The U.S. will continue to lose its pole position in relation to other countries.
F: It’s safe to say that I was wrong on this one. The dollar is much stronger now, for instance. However, the long-term demographics and astronomically high debt in this country simply do not support the U.S.’s position relative to other countries. I would like to be wrong on this, but we have to face the long-term consequences of our nation’s debt management.
6. The student loan bubble is now more than $1 trillion, with a relatively high late-payment rate. I thought this would pop in 2013, but I was wrong. I have learned from my mistake here and don’t want to predict whether or when it may pop because it seems like this could go on for a while, but if it pops or adjusts, it will have an impact on college costs and college funding.
Incomplete: I learned from 2013 not to make predictions about this and instead simply observe what’s happening. It’s gotten worse still, with remarkably high delinquency rates. I’ve given up on wondering if or when the bubble will pop, but it’s certainly a big issue worth watching.
7. The housing market in Dane County continues to look reasonable if not good given what my developer and real estate colleagues are telling me about a limited supply of housing coupled with a pretty strong economy and still relatively low interest rates. However, the housing market in parts of the country that experienced bubble-like valuations five years ago (Florida, Arizona, etc.) looks kind of expensive again, with an odd demand landscape.
B-: I was right about certain markets in Dane County (sub-$600,000 level), and it seems housing has cooled off in some national markets, although the high-end markets in major cities continue to be strong.
8. My “what keeps me up at night theme” would be some sort of new war or environmental disaster. For example, I’ve been very concerned about the Fukushima Daiichi nuclear plant disaster of 2011 and its ongoing effects on the planet. It gets very little media attention but has long-term global implications on the environment and our quality of life. Perhaps 2014 could be the year the world understands the ongoing devastation Fukushima is causing around the globe. Along the same lines, I think the Japanese/Chinese conflicts are real. Maybe they’ll lead to nothing, but maybe they’ll become disruptive in the long term. I would rather not have to consider the possibility of economic, political, or environmental disruptions, but if you study history at even a cursory level, you know that these types of events actually occur with regularity and can have sizeable impacts on our future plans.
C: I read a report that 2014 was one of the safest, most peaceful years in history. I don’t know how one measures that, but if that’s the case, I failed in this prediction. It seems few care about the Fukushima accident, even though the evidence continues to show that it was horrible for the environment. It seems the conflicts between China and Japan are calming. Russia did invade Ukraine, though. Apparently, I’m out of my element when it comes to geopolitics.
9. A repeat from last year, because it’s just too easy: There will be another manufactured economic crisis that the media and politicians will exploit, and some folks will overreact to it, making some very bad decisions with their money as a result.
A: I shouldn’t grade myself here; it’s too easy.
10. Finally, another self-indulgent softball: Some asset classes will rise, some will fall. Diversification will still be the middle ground, which works for most. (I cut-and-pasted that one.)
A: Again, it’s kind of silly to even grade myself on this prediction.
Overall, I did about as well as I expected: I nailed a few and totally missed the boat on others. This is as it should be, since anyone who thinks he can accurately predict what will happen in such a complex world is delusional.
My goal with this series of blog posts is to 1) have some fun and 2) (and more importantly) show how hard it is to make predictions.
Keep focusing your time on building a good plan, ignore the noise, and enjoy 2015.
Happy New Year!
Michael Dubis is a fee-only certified financial planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at firstname.lastname@example.org. This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s. Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future. THIS COMMUNICIATION MAY NOT BE USED BY YOU AS A RELIANCE OPINION WITH RESPECT TO ANY FEDERAL TAX ISSUE DISCUSSED HEREIN AND IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU BY THE INTERNAL REVENUE SERVICE.
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