17th July 2014
Patrick Connolly, certified financial planner at independent financial advisers Chase de Vere looks at the perils of predicting the unpredictable in the world of savings and investsments…
Renowned economist JK Galbraith once said: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” He has a point.
The truth is that the future is unpredictable and nobody knows for sure what will happen. How many people predicted that Germany would beat Brazil 7-1 in the World Cup semi final? It has been reported that the bookmaker William Hill had 120,000 customers who had bet on the correct result for this game and not one of them got it right.
UK interest rates have been at the historic low level of 0.5% since March 2009. This has created a huge problem for many cash savers. They have seen the rate of interest being earned on their accounts fall to next to nothing; certainly far less than the rate of inflation, meaning the real value of their money has been reducing over time.
Since interest rates fell to these levels there have been ongoing predictions about when they might start to rise again; these are still happening. Cash savers who have been waiting for rate rises have been waiting in vain and many have been ‘forced’ to move to riskier investments in the hope of generating better returns.
Who predicted that rates would remain so low for so long? In 2009 if cash savers had thought that interest rates might still be at 0.5% today, many more would have taken the plunge into other assets.
It isn’t just interest rates. What about inflation? One minute we need to be worried about rampant inflation the next about deflation. Each piece of economic news or monthly inflation figure seems to turn sentiment and forecasts completely on their heads.
What about house prices? Has anybody consistently called house price movements right over the years? Will they continue to rise, will they stay steady or are we due a crash?
It’s the same with investments. The funds and sectors which are most often recommended to outperform tend to be those that have already performed well rather than those which are best positioned to do so in the future.
Three years ago there was a common view in the investment industry that the stock markets of up and coming emerging markets, with strong economic growth and young dynamic populations, would outperform turgid Western markets, which had little or no economic growth and were saddled with huge levels of debt. Since then the average UK and US investment funds have risen by about 30% while emerging markets funds have fallen by 8%.
In May 2012 with the FTSE-100 standing at around 5,300 points there were predictions that a big drop was on the cards and the market could drop to 4,000 points, creating great buying opportunities for investors. Since then, of course, the market has continued to rise with the FTSE-100 now within touching distance of 7,000 points. Anybody sitting on the sidelines waiting for a fall to 4,000 is likely to be waiting for a very long time.
With your finances, if you accept that you don’t know what will happen in the future, the best approach must be to position your savings and investments so that whatever happens you have the best chance of achieving your financial goals. For most people this should include a combination of cash, shares, fixed interest and property, which should be reviewed on a regular basis.