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This commentary is written by Vanguard Head of Retail Robin Bowerman. The title is Wanted: Plenty of scepticism

It was first published on Friday 28 January 2011

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

This is the time of year when investors inevitably face numerous forecasts in the media about how investment markets will perform over the next 12 months.

While these sometimes may provide interesting and useful information about the markets and economies, short-term forecasts in particular should typically be treated with a healthy degree of scepticism.

Understandably, not all investment and economic forecasters agree; a number are determined bears while others always seem to be bulls. And there are those who always seem to huddle together with remarkably similar expectations for the markets.

In the Wall Street Journal this month, regular columnist Jason Zweig gives his view on short-term investment forecasts: "Later in the year, nearly all of the forecasts turn out to be wrong."

And Zweig asks: "Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong?"

His well-researched article emphasises that:

    1.    No expert can reliably predict how investors will react to changing market and economic conditions or news.
    2.    Many forecasters tend to intentionally adopt a consensus position, which, in itself, can contribute to forecasts being inaccurate.
    3.    Forecasters can analyse the same pieces of information in different ways – leading to different conclusions.

"This doesn’t mean these forecasts are worthless – far from it," Zweig adds. "By seeing how wide the potential range of error is, you can adjust your own expectations to make sure you don’t make an overconfident decision."

The difficulty with making accurate short-term forecasts highlights how few investors, even long-term professionals, rarely succeed in consistently picking the best time to buy or sell.

And the difficulty with investment forecasting underlines the importance of having an appropriate strategic asset allocation rather than trying to identify short-term winners and losers.

And that concludes the column

Wanted: Plenty of scepticism

from Robin Bowerman, Head of Retail at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.