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Originally published Saturday, January 11, 2014 at 8:03 PM

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2014 forecasts? Listen carefully but don’t act | Chuck Jaffe

It’s not that making predictions is a fool’s game — it’s fun and it distills an expert’s thinking down to something easy to digest — it’s that acting based on those forecasts is.

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The problem with listening to year-end and year-ahead financial forecasts is that someone will be right, most will be wrong and all will be forgotten by everyone but you long before the year is out.

It’s not that making predictions is a fool’s game — it’s fun and it distills an expert’s thinking down to something easy to digest — it’s that acting based on those forecasts is.

That has never been more clear to me than last month, when my talk show had a run of tremendous guests, all of them talking about the year ahead and none of them in real agreement over what happens next.

Grace, a forty-something listener from Tacoma, Wash., who has been taking greater charge of her finances since going through a divorce two years ago, wrote that each guest has been smart and sounded great, but that the abundance of advice had left her confused about what to do next.

“If I only listened to one show, I could have come out thinking ‘Yup, that’s a good expectation for what’s going to happen and how I should act,’ ” she wrote, “but since I listen every day, it all sounds good but I can’t decide who to believe is right.”

It started with Jim O’Shaughnessy of O’Shaughnessy Asset Management — author of “What Works on Wall Street” — suggesting that anyone who needs yield and income will want to look at global high-dividend stocks, because they won’t find that income in 10-year Treasurys and domestic dividend plays have been bid up.

Next, it was David Lafferty, chief investment strategist at Natixis Global Asset Management, suggesting that volatility would be up for the first quarter of 2014 — and possibly the first half — but noting that investors with reasonable expectations should ride it out to reasonable single-digit gains for the year.

Brian Sullivan, chief investment officer at Regions Investment Management, said he expected that the Federal Reserve’s actions had already been priced into the market, so that investors should not expect the aftereffects of tapering to bite into the uptrend, while Steve Scruggs, manager of the Queens Road Funds contradicted that by suggesting that there will be adverse effects to the market and the economy as the central bank decreases its financial support.

Scott Wren, senior equity strategist for Wells Fargo Advisors, is nervous that the market’s recent rally is eating into returns investors might have expected from 2014, which should make the 12 months ahead feel worse than he might have expected at the end of the third quarter.

John Herrmann, the rates strategist for Mistubishi UFJ Securities was far more bullish about the economy than most, suggesting that the broad economic numbers have been misleading and the nation’s underpinnings are much stronger than most people believe, while Peter Schiff, chief global strategist for Euro Pacific Capital, is one of the loudest bears around, and he was growling about how investors need to overhaul their investment strategy or risk getting mauled by what lies ahead.

Russ Koesterich, global chief investment strategist for BlackRock, noted that the prospects for the year ahead are significantly less than what investors have lived through in 2013, making it a “pick-your-spots” market, where investors move a bit from small caps toward larger companies, moving some allocation from defensive companies into cyclical securities, and then cutting back on domestic issues in favor of a more global approach.

A few days later, Bill Nygren of the Oakmark Fund, suggested — as he would in all market conditions — that investors keep their eyes focused far down the road, looking at five-year time horizons rather than the short-term, and noted that doing that means that it’s easy not to worry much about 2014 regardless of how it turns out.

You get the picture.

It’s no wonder someone like Grace — who is trying to prepare for the year ahead — is flummoxed. One day she’d be getting more defensive, the next more aggressive, the next out of the market entirely, and shortly thereafter she’d be back in whole hog, but completely out of bonds.

It doesn’t invalidate what any of the experts said. It’s just a reminder that their job involves making forecasts, but an investor’s job is not about forecasting at all.

Instead, to the average investor, the point of all of these forecasts is to frame expectations.

Taking in so many predictions and look-aheads makes investors consider different points of view, a worthwhile effort precisely because it is so easy for experts to sound “smart,” but so difficult for them to actually be “right.”

In the early 1990s, The Economist told a joke about Albert Einstein arriving at heaven’s gates and meeting three men, asking each about their IQ.

The first man claims a 190, and Einstein says “Wonderful, we can discuss my theory of relativity.” The second answers 150, and Einstein says, “I look forward to discussing the prospects for world peace.”

When the third man says he has an IQ of 50, Einstein says “So what is your forecast for GDP growth next year?”

Only a moron would act on forecasts.

The smart thing to do is to use them to frame expectations, to come up with the broad assumptions that you can believe in, that allow you to frame an asset allocation around so that you are acting — or sitting still and not acting — in a manner that you will be able to live with no matter what happens next, rather than using every market hiccup as a reason to change directions and strategies.

Nothing in economic theory or stock-market history should lead you to believe that anyone can predict the future accurately. Keep that in mind as you listen to forecasts and decide which ones to put stock in.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright 2014, MarketWatch

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