Never Mind the Predictions: What Did We Learn?

January 6, 2014

Never Mind the Predictions: What Did We Learn?

By CARL RICHARDS

I’m not big on market predictions. In fact, if anyone asks, I’m pretty quick to say that I don’t know what the markets will do in 2014. If you absolutely must have predictions for the next year, then I recommend you check out Barry Ritholtz’s annual list. But if you are interested in something more useful than predictions, I suggest taking a look at what we learned (or had confirmed — again) in 2013.1. What goes up, will go down.

After going up for 12 years, gold gave us one more example that just about the time your neighbor starts yelling about how it is the only safe place to put your money, things change. In 2013, gold prices declined 28 percent.

2. What goes down, will go up.

As I discussed last week, home prices have headed steadily upward since 2012. In fact, according to the S&P/Case-Shiller home price indexes, prices rose 13.6 percent over the 12 months that ended in October, the fastest increase since February 2006. But remember how we felt about housing prices in 2008-9?

In February 2009, CNNMoney.com reported: “Home prices fell 12.4 percent during the fourth quarter of 2008, the largest year-over-year decline since the National Association of Realtors began keeping comprehensive records in 1979.”

No matter how bad we felt about home values, markets do turn around. Of course, the improvement in the housing market has led to the next phase: bubble spotting.

3. Looking for bubbles isn’t an investment strategy.

Based on what we have experienced in the last 10 years, I understand why we obsess over trying to identify the next bubble. Of course, it would be awesome if we could have predicted when the bubble was going to burst on tech stocks in ’99 or on home prices in ’07. The reality is that trying to spot bubbles to guide our investing decisions doesn’t work. Case in point: the less-than-accurate predictions that the stock market was just a pinprick away from popping in 2013. Turns out 2013 was a good year for stocks, but of course that does not mean 2014 will be.

4. Past performance doesn’t predict future results.

United States stocks did incredibly well in 2013. When you include dividends, the Standard & Poor’s 500 rose 31.9 percent. That’s the best year since 1997. With the Dow up 26.5 percent and the Nasdaq up 38.3 percent, it’s tempting to get excited about 2014. But what happened in 2013 gives us no real indication of what is in store for 2014. The only thing we know now is that the markets had a great year — that’s it.

5. Buying high and selling low still doesn’t make sense.

Given the huge year the stock market had, there is a temptation to think that now is the time to shift more of our portfolios into stocks. It’s easy to understand why we feel this way. After all, the stock market is doing well, we are hearing about it in the news, and we don’t want to miss out. But remember, since it is now January 2014 you have already missed the opportunity to buy in January 2013. Now the market is higher, and we have already established that we do not know what the market is going to do next. We only know what it has already done. Resist the temptation to buy high, and instead focus on maintaining a well-designed portfolio that reflects the risk needed to meet your goals.

6. Crises come and go.

Maybe I missed it, but did the world come to an end on Oct. 1? After all, the United States government closed up shop for 17 days. While it was not pleasant for furloughed federal workers and tourists wanting to visit national parks, it is hard to see why this most recent crisis du jour was worth all the news coverage (almost 500 million Google hits). In 2013 we were reminded yet again that whatever “this” is, it too shall pass, and accommodating the latest crisis is not an excuse to upend an investing strategy.

These are just a few of the lessons I spotted in 2013. I have no doubt that in 2014 many of these lessons and probably several others will be reinforced. The only question is whether we have already learned the lessons or we will keep repeating our mistakes.