When you look at investment performance with the benefit of hindsight, you may think you could predict how markets will move. Yet, markets are unpredictable and expert forecasts prove how difficult timing the market is.
Every investor has heard the advice “buy low, sell high”. So, it can be tempting to try and guess how investments will perform in the short term to make the most of your money. But history shows us that trying to time the market is impossible.
Even experts who have far more resources at their disposal sometimes get it wrong, so trying to predict the market and economy could mean you miss out. Here are five examples of when expert predictions completely missed their mark.
1. 1929: The market has reached a “permanently high plateau”
Irving Fisher is considered one of America’s greatest mathematical economists. But his name is still linked to a major incorrect prediction – in 1929, he claimed that stock markets had reached a “permanently high plateau”.
Just nine days later, the “Great Crash” occurred and led to the collapse of the New York Stock Exchange. In a single day (29 October 1929), investors traded some 16 million shares, making it the largest sell-off of shares in US history and investors lost billions of dollars. The crash signalled the start of the Great Depression.
2. 1995: The internet will “catastrophically collapse”
When you’re considering investing in new industries, expert advice can be invaluable. However, basing your investment strategy on predictions could mean you miss out on opportunities.
In 1995, Robert Metcalfe, the co-inventor of the Ethernet, gave a magazine interview where he said the internet would “soon go spectacularly supernova” and in 1996 “catastrophically collapse”. He was so confident, he promised to eat his words if he was wrong.
Of course, almost three decades later, we know that wasn’t the case. The internet has become an integral part of everyday life and business operations. Metcalfe stuck to his word though – he blended the magazine and literally ate his words in front of a live audience.
3. 1999: Stock values will soar fourfold
Just before the turn of the millennium, two experts, James Glassman and Kevin Hassett, published a book that claimed stocks in 1999 were significantly undervalued. As a result, investors could benefit from a huge rise in value over the next few years, they said.
In fact, they predicted the value of stocks would increase fourfold and the Dow Jones Industrial Average would increase to 36,000 by 2002 or 2004.
Just two years later, the dotcom bubble meant the stock market fell sharply. Other factors, including the 2008 financial crisis, meant that the Dow didn’t reach the 36,000 milestone until 2021.
4. 2007: The subprime mortgage market troubles are “largely contained”
Many investors will remember the effects of the 2008 financial crisis, which was partly caused by the subprime mortgage market in the US. Looking back, it can seem like all the signs of impending trouble were there, yet many experts failed to connect the dots.
Former US treasury secretary Hank Paulson said the subprime mortgage market would be “largely contained” and he didn’t see it causing a “serious problem” in 2007. He wasn’t the only expert to downplay the risks either. Others agreed, and some even suggested that it presented an opportunity.
The problem turned out to be far-reaching – it triggered a global recession, markets fell in value, and governments had to bail out financial institutions.
5. 2021: Inflation will peak at around 5%
As it considered the lasting effects of the Covid-19 pandemic in November 2021, the Bank of England (BoE) predicted that inflation would be around 5% in spring 2022 and that the period of high inflation would be temporary.
Just months later, the war in Ukraine meant that oil and gas prices were much higher than anticipated. Other factors also affected the cost of living, which was high for much of 2022. Inflation reached 11.1% in the 12 months to October 2022 and remained well above the BoE’s 2% target at the start of 2023.
How time in the market could help you overcome volatility
The five examples above highlight how difficult it is to time the market. While you may base your prediction on information available at the time, there are so many factors that could affect how the market moves that are outside of your control. As a result, trying to time the market could mean you miss out on growth opportunities.
For most investors, a long-term investment strategy focused on time in the market makes sense. Rather than buying and selling frequently, creating a portfolio that reflects your goals and risk profile could help you build long-term growth. While markets do fall, and so can the value of your investments, historically, markets have recovered from dips and delivered growth over a longer time frame.
It can be difficult to ignore the noise when you’re investing and you may be tempted to make changes. However, looking at the value of your investments over years, rather than days or weeks, is important. Remember, time in the market, rather than timing the market, could deliver long-term value.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.