The folly of forecasts

By: David Stonehouse • December 12, 2018

Forecasting investment performance can be a huge challenge. Here’s what investors need to know.

Predicting the percentage returns of stocks and other asset classes is a staple in many investment outlooks this time of year, but history shows the numbers don’t often add up.

Indeed, as Yogi Berra said, “It’s tough to make predictions, especially about the future.” Based on our research of various sell side reports over the past two decades, a high proportion of predictions play it safe and call for upper-single digit equity increases most years. Since annualized returns over the long term have been approximately 7.5%, this approach seems reasonable. Actual annual returns are highly variable, however. The S&P 500, for instance, has only delivered mid- to upper-single digit price returns about 8% of the time since 1927.

So far this century, strategist forecasts have typically missed the actual outcome by an enormous margin of 13.1% on average (see accompanying graphic for source). In fact, in one third of the past 18 years, the realized return of the S&P 500 has been outside the range of every forecast, either coming in higher than all estimates or lower than every estimate. In addition, the average forecast ended up being within 5% of the actual return in only five out of 18 cases.

forecast facts

Source: Bank of America Merrill Lynch, Bloomberg LP. All data above was compiled from December 31, 1999 to December 31, 2017. The number of year-end forecasts varied from a low of eight in 2008 versus a high of 21 (2013, 2015).


These inaccuracies don't just apply to equity forecasts. There is also evidence of the difficulty in predicting the future returns of other asset classes such as sovereign bonds. But that’s not to say the analysis accompanying these forecasts isn’t sound – in fact, it can provide valuable insights to investors.

Rather, it’s a reflection of how dynamic markets can be and a reminder to all of the importance of being prepared for any kind of eventuality to unfold. So instead of trying to make a precise forecast of returns next year, an investor could focus on potential upside and downside risks to the consensus forecast. After all, if returns only end up being in the mid- to upper-single digits a small percentage of the time, that means that most years returns will either be up double digits or flat-to-negative.

Therefore, investors could try to consider whether a strongly positive outcome is more likely, or whether negative risks will prevail. To put it another way, if one assumes that consensus is wrong in any given year, the question to ponder is whether reality will be better (a very good year for stocks) or worse (a flat to down year).

Commentaries contained herein are provided as a general source of information based on information available as of December 7, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Publication date: December 12, 2018

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