It’s that time of year when everyone starts preparing for the New Year and Wall Street makes its 2016 predictions.  I’ll get right to the point here – these annual predictions are largely useless.  But it’s still helpful to put these predictions in perspective because it highlights a good deal of behavioral bias and some of the mistakes investors make when analyzing their portfolios.

The 2016 annual stock market predictions are reliably bullish.  Of the analysts that Barrons surveyed they found no bears and an expected average return of 10%.  This is pretty much what we should expect.  After all, predicting a negative return is a fool’s errand given that the S&P 500 is positive about 80% of the time on an annual basis.  And the S&P 500 has averaged about a 12.74% return in the post-war era.  So, that 10% expected return isn’t far off from what a smart analyst might guess if they’re at all familiar with probabilities.

There is a chorus of boos (and some cheers) every year when this is done.  No analyst will get the exact figure right and there will tend to be many pundits who ridicule these predictions despite the fact that expecting a positive return of about 10% is the smart probabilistic prediction. In fact, if most investors actually listened to these analysts and their permabullish views they’d have been far better off buying and holding stocks based on these predictions than most investors who constantly flip their portfolios in and out of stocks and bonds.  But that’s the reason why these predictions exist in the first place.  Because every year investors perform their annual check-ups and evaluate the last 12 months of performance before deciding to make changes. And of course, Wall Street encourages you to do exactly that because turning over your portfolio means increasing the fees paid to the people who promote these annual predictions. But when we put this analysis in the right perspective it becomes clear that this mentality is misleading at best and highly destructive at worst.

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