If the experts cannot predict the markets, you can’t either

Were you able to predict the global bear market that sucked trillions of dollars out of investors’ pockets in late 2008? In retrospect, it looks like it should have been easy to predict—after all, the subprime mortgage crisis had gone on for a year before stocks started crashing in October 2008. It seems obvious that the economy was collapsing and that stocks were going to head down sharply.

Unfortunately, that is our hindsight bias talking. The past always looks inevitable and predictable, because we now know what happened. But even the experts have a tough time predicting the markets. In fact, they usually make more wrong predictions than right, and these are the people who have more information at their fingertips and more experience than most investors.

Consider what the experts said at the beginning of 2008, when the storm clouds were already gathering. Global strategists for Citigroup in late December 2007 issued a report that said the bull market was not dead. While “undoubtedly mature and subject to increasing volatility, the current bull market is not yet over.” Market analyst Jeffrey Kleintop of LPL Financial in Boston told his clients the market would have a “fourth quarter breakout to the upside as the uncertainty fades and the U.S.economy avoids a recession.” The Wall Street Journal told readers on Jan. 2, 2008 that “European shares are likely to rise this year for one reason: They are cheap.”

Even at the end of the third quarter, just before the crash came, the forecasts were muddy. The Hulbert Financial Digest, which rates the performance of investment newsletters, found that the 10 best performing newsletters were far more bullish than the 10 worst newsletters. Although the 10 best newsletters had demonstrated the most skill in allocating assets over the previous 15 years, that wasn’t enough for them to foresee the bear market.

Apply this forecasting lesson to your own view of the markets going forward. It might be helpful to write your predictions down and look at them in a year.