In this month’s edition of “Money Matters,” Scott discusses why investors should not rely on so-called “expert” financial forecasts from anyone. He explains some financial strategies for long-term financial planning to help individuals achieve their financial goals without depending on what might happen in the market.

Money Matters: 2023 Financial Outlook & Stock Market Predictions

0:00:00.5 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. And Scott joins us now by phone. Welcome, Scott.

0:00:24.4 Scott Oeth: Good morning, CJ.

0:00:25.4 CJ: Good morning to you. So, there's predictions all over the place about what we can expect for 2023. What are your thoughts about or insight into what the market is going to do in 2023?

0:00:41.2 SO: Yeah, great question, CJ. And this is one of the most common. I'm asked this all the time. People with large portfolios, millions of dollars want to know this. People just getting started, maybe a few hundred dollars going into their company retirement plan. It just came up here on lunch the other day, people want to know, what's the market going to do this year? What do you think? And I guess, first of all, I should say is, we always throw out that this is a general conversation. People need to seek their own professional advice, do their own research, but I'll tell you, I have many thoughts on the market. You could maybe even call them educated guesses, but CJ, the reality is, I'm convinced I know I don't know what the market's going to do this year, and I really don't think anyone else does either, so.

0:01:26.3 CJ: Alright.

0:01:26.5 SO: This time of year, you're right, the predictions are all over the place. My inbox is flooded. All the big major investment firms you can think of—the big names that are out there, the major banks, the major insurance companies, the mutual fund companies—almost every one of them has someone with a title, something like, chief market strategist, sometimes chief economist, and they'll put together these market forecasts, 2023 market expectations and so on. I'll say often, they're kind of interesting. They're something well thought out, well researched, although I suspect quite a few of them are simply copycats of one another. But the sad thing is, CJ, they really have not proven to be accurate at all over time. I've seen one study showing that the correlation between analyst predictions and what happens in the market at a mere 0.15%, or 0.15.

0:02:20.0 CJ: Wow.

0:02:22.9 SO: You know, one would be a perfect correlation, 0.15. So, there's almost no bearing to each other. Warren Buffett, one of the most famous investors of all time, has this great line. He says, "The only value of stock forecasters is to make fortune tellers look good." So, I really urge caution here for people. But it's human nature. People want these types of predictions for whatever reason, and they gobble them up. Like, I get asked this all the time, and I'll say personally, I find them a bit interesting. I think they're case studies... The way I view it is, they're case studies in what might happen, given the known sets of facts and circumstances. I don't follow sports, CJ, but I imagine it's something maybe a bit like listening to pre-game chatter from analysts for an event, except probably not anywhere near as accurate.

0:03:13.0 SO: So, I think there's two really big problems. I mean, there's several, but two to, I think, be aware of. Well, the first one is the unknowns, these wild card events. There's this great sort of line, people are snickering at. You know, Donald Rumsfeld was talking about known knowns, known unknowns, unknown unknowns, as you're trying to look at predictions and forecasting. There are so many things. We've talked about so many things over the years, CJ. The supply chain crisis, COVID, Russian invasion. Most of these things were not predicted, they were not known or the impact wasn't. And so, we just don't know. Long-term, we look at decades or 100 years’ worth of stock returns, large US company stocks have averaged about a 10% return over the long haul. In any specific year, the returns do not tend to cluster around that average. But that's what analysts, that's kind of the safe prediction. They basically say, oh, about 10% returned off. That's what they put their number on, but they're often wildly off their mark.

0:04:15.3 SO: I think another problem, this one really sort of irritates me is, people in the investment world who make bold predictions, they get exposure, they get press time. That's exciting. It's interesting.

0:04:27.4 CJ: Right.

0:04:28.1 SO: And so, they draw attention. And I think many of them have realized that even though they're wrong, memories are fairly short, people forget about it, but the attention they get, the exposure they get by going on the business channels and talking about what to expect for the market, the business building impact outweighs if they're wrong on the investment side or not. So, these short-term types of decisions, making large moves in your portfolio based on for them can really be hazardous to your wealth.

0:05:00.1 CJ: Okay. So, if the forecasts haven't been very accurate over time, and we can all agree that's true, how should people make investment decisions?

0:05:09.1 SO: Well, I think the great news is, you don't need these types of short-term predictions to be a great long-term investor. And one pretty good approach that I've seen work very well for many people over the years, better than trying to make large bets based on predictions, is to simply adopt a static asset allocation, to take a look at long-term historical returns. Ideally, you want to really be looking at the volatility of these different types of asset classes and that's third element. This is a little trickier, this is usually where you're kind of getting to pro level type research. You'll see what is the correlation, how do those different types of asset classes move compared to each other. Those are kind of the key components you might be looking at when you're considering adding blocks of different types of investments to your retirement plan or your IRA or your portfolio. And that mix should really be built to achieve your financial goals, not based on predictions about what's going to happen in 2023 and not trying to outperform the market. So, that works very well.

0:06:10.6 SO: There's another famous investor, Howard Marks, he's done very well over time. He's a wonderful writer, I enjoy reading his writing. He describes this as people in the investment world, there's the, I know camp, that's based on predictions and prognostications. And then, there's the I don't know school and that's where I put myself in. And that's just, I think, being honest and saying, there's too much, too many of the unknown unknowns that we can't predict. And he says, the I don't know school, adherence, believe, you can't know the future and very importantly, you don't have to know the future. And the goal is really to do the best possible job of investing in the absence of that knowledge. So, I think there's a whole lot you can do there that is a tremendous long-term benefit without having to make short-term moves or rely on these forecasts.

0:07:01.8 SO: If you do, most indicators have proven worthless in the short-term valuation measures that analysts look at, maybe have some predictive value. If you're going to do some of that, you say, "Hey, I really think this is an opportunity or I really think this is a varied risk." My personal philosophy, give yourself a very short leash on those types of moves, not wild moves in the portfolio, but maybe more modest stepping into opportunity or pulling back from the edge of risk.

0:07:35.3 CJ: Okay, so it sounds like, we're probably not going to get you to commit to any short-term market calls for 2023. Do you have any predictions that you'll go on the record with?

0:07:48.0 SO: Well, okay, so, what I'll say is, stocks will likely be up in 2023.

0:07:55.1 CJ: Okay.

0:07:55.1 SO: But, you know CJ, there's also a very good chance they'll be down.

0:07:58.1 CJ: Ah, Okay.

0:08:00.3 SO: So, not very helpful, is it? And it's not for making short-term bets. But historically, the numbers here actually I think are pretty helpful. And what we know historically is that two out of every three years, the market has been up. And over longer periods of time, we get closer and closer to that 10% average. And it's important to note that this has been true, this up two out of every three years, that's true after bad stock market years and good stock market years. And so, we tend to have this recency bias where we overweight recent events and project those into the future. But we go back and look at long periods of market history. That's what's played out. And I would also say, here's another prediction, there's increasingly good chances that if we look at the next five years, 10 years and 50 years, things will be up. And you can see that number 10% average, but people have a hard time recognizing what that really means in dollar value and how powerful that is.

0:08:57.7 SO: The simple rule of 72 when you're doing rough measures on compounding, if we deliver anything near that 10% historical long-term average over that next five, 10, 15 years, well, a well-designed portfolio of stocks will double in 10 years and quadruple in 20 years. And I mean, I've seen it having worked with people for long periods of time. It's hard to imagine it looking forward. And we look back, the big prediction is, when we're talking in year 2023, or for those of us who are lucky enough to be around 2043, or certainly our offspring, probably will think is, will be very happy that we're investors today and wish that we had more money to buy stocks.

0:09:41.9 CJ: For them, right?

0:09:44.0 SO: Yeah. Yeah. One last prediction, CJ.

0:09:47.3 CJ: Okay.

0:09:48.8 SO: Wild card event, the unknown unknown. Expect a wild card. Your predictions are often wildly off because of things that we can't predict, both on the upside. We're often surprised by how good things turn out to be better than expected. And sometimes, years like 2002, 2008, and last year, 2022, we're surprised on the downside. So, you know, expect that wild card.

0:10:14.7 CJ: Alright.

0:10:15.5 SO: And don't put more at risk than you can afford to in the short-term. Make sure you're protected for the short-term emergencies, like we talked about many times.

0:10:23.0 CJ: All right. Well, Scott, thank you for that. It was helpful, even though you know, didn't give us any stocks to invest in. We really appreciate your wise words.

0:10:32.6 SO: Was I a little slippery there? A little...

0:10:33.8 CJ: You were a little tiny bit slippery, but that's good, because it keeps us on our toes. So, I really appreciate it, Scott.

0:10:39.7 SO: Yeah.

0:10:40.4 CJ: All right.

0:10:41.1 SO: Thanks, CJ.

0:10:41.4 CJ: You bet. Bye-bye.