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This time of year we hear a lot of noise about how the economy and the markets are going to look 12 months from now – even more so when there’s an election in November.
Predictions can be interesting, even important, but are nothing to base investment decisions on.
At Money Talks News, we’ve been doing a little experiment for seven years now. And here’s what we’ve found: Experts are no better than anyone else when it comes to predicting the future. In fact, in many cases, your guess isn’t as good as theirs, it’s better.
See for yourself. In the video below, Money Talks founder Stacy Johnson resurrects year-old video containing 2011 predictions from David Wyss, the Harvard-Ph.D. chief economist of Standard & Poor’s, as well as random people he literally stopped on the street.
Score another one for Main Street – their predictions win again. Here’s a recap of the answers we got versus reality, with the median used when they gave a range. We’ll also include Stacy’s predictions from last year for fun:
Expert: Up 10 percent
Non-expert: Down 8 percent
Stacy: Up 12 percent
Reality: Up 5 percent
Winner: Expert (5 percentage points off). Note: This outcome depends on how you measure the market. The 5-percent return above refers to the Dow Jones Industrial Average. Switch the standard of measure to the S&P 500 and the market was virtually unchanged for the year, meaning the man on the street wins.
Man on the street: $100
Reality: $100 on the last trading day of the year
Winner: Man on the street (on the money)
Expert: Up 0 percent
Non-expert: Down 4.5 percent
Stacy: Up 3 percent
Reality: Down 4 percent according to the S&P Home Price Index
Winner: Man on the street (half a percentage point off)
So Main Street wins at least two out of three against Wall Street, and by a wide margin of accuracy. And they beat Stacy’s guesses too. Of course this isn’t a scientific study, but why does it happen?
It’s not that Main Street is smarter – they get it wrong sometimes too. In 2008, neither the pros nor average folks came close to predicting the stock market would plummet 30 percent.
As Stacy said this time last year, “The truth is that the variables that influence the price of stocks, housing, and oil are numerous, complex, and, ultimately, unknowable.” Just like the weather, the experts are probably a lot better than us at reading the signs a few days out. But a year out? It’s anybody’s guess – including yours.
We’ll be carrying on the experiment for next year too. Check back Wednesday for our story looking at 2012 predictions from Wall Street and Main Street.