James Sweeney No Comments

It seems the financial media’s favorite thing to do is make wild predictions. The more extreme the headline, the better. Today’s headline1 on Yahoo! Finance was particularly grabby:

“2016 marks the end of the great bond bull market”

To make it even more dramatic, the article actually gives the exact date of death: July 11.

Well, I guess that is that. Thank goodness, we have these trusty analysts at Yahoo! to let us know when to get into and out of markets!

But in all seriousness, what is the point of these types of articles? Does Yahoo! really think they have some sort of unique insight into the bond market?

When I read this headline, I immediately thought back to 2013. Remember what happened that year? Mr. Ben Bernanke, then head of the Federal Reserve, hinted that the Fed might begin to wind down its bond purchase program, commonly referred to as quantitative easing. The bond markets threw a fit, dubbed the “taper tantrum”. Yields on 10-year treasuries jumped 1% from May to June.

After the first week or so of that bond market meltdown, the Wall Street Journal ran an article2 titled:

“Bill Gross: Bull Market in Bonds Is Over”

Earlier that day, the world’s leading bond expert had tweeted “The secular 30-yr bull market in bonds likely ended 4/29/2013.”

Picking up on a pattern here?

After Gross’ definitive statement, bonds continued to sell off, and rates ended the year near 3%. But the story doesn’t end there. 2014, 2015, and the first half of this year saw rates fall right back to where they had been, and actually reach all-time lows in early July. Seems Mr. Gross was a bit early on his prediction.

Another of my favorites was the 1979 article3 in BusinessWeek titled “The Death of Equities.” What followed in the 80’s and 90’ was one of the longest and largest bull markets in history.

Now I’m not saying that today’s prediction is doomed to be just as wrong as the others I’ve mentioned. In fact, it’s possible that bond prices will continue to fall.

The point is that basing your investment decisions on these types of predictions is likely to end badly.

No, Yahoo! doesn’t have a crystal ball. Neither does the Wall Street Journal or CNBC. Not even the smartest and most informed experts can predict what the future holds on a consistent basis. In fact, some studies4 have shown that people who have managed to correctly make a bold prediction are even less likely than the average person to make a correct prediction in the future. Why?

It could be that bold predictions are simply difficult to make. With the sheer volume of predictions, some of them are bound to be correct just by chance. The fact that someone happens to get one right may say more about the type of predictions they like to make than their skill at making predictions.

In short, someone who makes a lot of bold predictions is likely to be wrong most of the time, even if they’ve been right before.

Of course, talking heads have little to lose and much to gain by making such predictions. Few people have much incentive to dig up failed predictions. On the other hand, a wild prediction that turns out to be correct can lead to fame and fortune.

And so, the predictions will keep on coming. Remembering two simple things will help you ignore the noise:

  1. Capitalism works – Prices incorporate all available information and respond quickly to news. Unless you start receiving tomorrow’s newspaper today, á la 90’s drama Early Edition, it makes no sense to trade on news you’re reading in the paper. If you’re reading something, it has already been incorporated into prices!
  2. Discipline pays off – markets have rewarded long-term investors. Your financial plan does not depend on avoiding every downturn in markets. It depends on your ability to stick to your plan so you can enjoy the returns that markets generate.

Whenever I’m faced with these types of distractions, I think of this image of a basketball player trying to shoot a free throw. The crowd is yelling and waving their arms – doing anything to try to pull the shooter’s focus from the hoop. With complete focus and discipline, the shot is very likely to go in. But even the slightest deviation from routine or break in concentration, and the odds plummet.

Don’t let the media pull your focus away from your target.


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