This is the time of year when the financial pundits peer into their crystal balls and make predictions for 2013. They want you to think they are the next financial guru with special expertise. The stakes are big for the winners. I don’t want to be left out, so here are my predictions for 2013:
1. Predictions will mislead investors. There will be no end of stock market predictions. Many of the major investment banks have already weighed in, telling us where they think the S&P 500 will end up in 2013. Some will be right. Some will be wrong. The percentage of the right ones will be no more than what you would expect from random chance. Relying on predictions about random events will cost investors big time. Those who were wrong will have no accountability, and next year they will be back in the prognostication game.
2. The hedge fund nonsense will continue. According to The Economist, the S&P 500 index outperformed the benchmark index for hedge fund returns for nine of the last ten years. After payment of the obscene fees they charge, most hedge funds underperform their benchmark. Nevertheless, investors will continue to give them money, often to their detriment.
3. Insider trading will increase. While most investors don’t understand how difficult it is to beat the market, Wall Street does. One way to game the system and achieve outsized returns is by engaging in illegal insider trading. In an ethically bankrupt industry with an unsurpassed record of conflicts of interest and blatant greed, the possibility of getting caught and doing jail time is just another cost of doing business. After all, generating fees is all that matters, right?
4. The financial media will continue to mislead investors. The financial media derives significant revenues from the securities industry. The securities industry profits when you do business with them. You do business with them because they have persuaded you they have the expertise to time the markets, pick “hot” fund managers, and select stock “winners.” Its worst fear is that you will find out this expertise does not exist. The financial media will continue to serve up endless blather by self-styled “experts” who reinforce the myth that their market insights add value and that paying minute-to-minute attention to the ups and downs of the market is a critical component of responsible investing.
5. You will underperform the market. Achieving market returns is yours for the taking. Yet, by investing in actively managed mutual funds (where the fund manager attempts to “beat the markets”) most investors are likely to fall short. For the one-year period ending June 30, 2012, almost 90 percent of actively-managed, domestic stock funds were outperformed by their benchmarks. Over longer periods of time, the majority of actively-managed funds fail to achieve benchmark returns. Just like wealthy investors who ignore the data and invest in hedge funds, most Main Street investors ignore the data, rely on stockbrokers, and invest in actively-managed funds.
Unlike others who make predictions and hope they will be right, nothing would make me happier than to be proven wrong.
Dan Solin is a senior vice president of Index Funds Advisors. He is a New York Times best selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now: How to Defend Yourself Against Rigged Markets, Wall Street Greed, and the Threat of Financial Collapse, was published on December 31, 2012.
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