This is the time of year when predictions are made for 2015. Most of them are nonsense. The self-styled experts supplying these predictions have no accountability for their accuracy. Nevertheless, some gullible investors make investing decisions based on such insights.
I dont want to be left out, so Ive come up with my own predictions. Mine are based on solid data, which is why I believe they are likely to be 100 percent accurate. Here they are:
- Those who are paid to manage other peoples money will be better off than those who listen to their brokers advice about how to manage their own.
- The securities industry will continue to make boatloads of money, whether the markets go up or down.
- Much of the financial media will continue to stoke fear, anxiety and appeal to investor greed rather than provide sound investment advice based on peer-reviewed evidence.
- Brokers will continue to tout their purported ability to generate alpha, defined as the excess return of a fund or portfolio relative to the return of a benchmark index.
- Relatively few investors will figure out that the opportunity to generate alpha has shrunk so significantly that pursuing it makes no sense.
- Most brokers who claim the ability to beat the market through stock picking, market timing and the selection of outperforming mutual funds will generate negative alpha for their clients.
- The securities industry will continue to create expensive products to increase fees and commissions. These products will be aggressively marketed with misleading sales pitches, like with this product, you get the benefits of a rising market and protection in a down market. Its the best of both worlds. Here are some examples of investments that were created to be sold, but likely should not be bought: hedge funds, private placements, non-traded REITs, variable annuities, closed-end funds and managed futures.
- Investors will continue to confuse luck with skill. Short-term data is meaningless. Peer-reviewed studies have found evidence of statistically significant skill in only a tiny percentage of mutual fund managers. Its almost impossible to identify those managers prospectively.
- The trend toward investing in index funds, exchange-traded funds and passively managed funds will continue. Investors have been bamboozled long enough. They are starting to wise up.
- More investors will realize that what correlates most closely with higher expected returns is low cost.
- The decline in the Nielsen ratings of CNBC will continue. More investors will begin to understand the difference between entertainment and sound investing advice.
- When reading articles with headlines like What to Watch for in Todays Markets, more investors will ask: Why should I care?
- The myth that hedge fund managers are masters of the universe with superhuman stock-picking skill will continue to be debunked. You can only ignore pathetic returns for so long. The continuation of cognitive dissonance on the part of investors is not a viable marketing strategy.
- The writings of responsible financial journalists (like my colleagues Larry Swedroe, Carl Richards and Tim Maurer, along with Jason Zweig, Rick Ferri, Jonathan Clements, Burton Malkiel, Allan Roth and others) will convert more investors to index-based strategies. Unfortunately, the majority of investors will still be swayed by the irresponsible musings of Jim Cramer, Art Cashin, Dennis Gartman and many others who claim the miraculous ability to peer into their crystal balls and either predict the future or explain what is going on with the market.
- More investors will understand that simply doing nothing is often the best investing strategy.
- Many investors will chase returns by bouncing in and out of the market or trying to find the next hot fund manager. Its likely these investors would generate higher expected returns by focusing on their asset allocation and investing in a globally diversified portfolio of index funds.
- The trade association for the securities industry will continue its tireless efforts to prevent brokers from being held to the same fiduciary standard as registered investment advisers. After all, why should brokers too have to put the interests of their clients above the financial interests of themselves and their employer?
- More investors will be surprised when they learn their broker is not required to even graduate from high school, much less have higher academic credentials in investing or finance.
- Some insightful investors will start asking their brokers this question: Since I can capture the returns of the global markets by investing in low management fee index funds without your help, shouldnt your compensation be based solely on your ability to generate returns in excess of the global market?
- More investors will appreciate the wisdom of John Bogle, the founder of Vanguard. At the beginning of his investing career, someone told him that nobody knows nothing, and what is presented as fact is really just opinion.
Note that none of my predictions involve telling you the direction of the market, when the much-dreaded correction may occur, or what stocks, mutual funds or asset classes you should purchase in 2015. That observation leads me to my final prediction:
Those who make these kinds of predictions, and turn out to be right, will be anointed as financial gurus. Those who are wrong will have no accountability. Hey, theres always next year!
Daniel Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book Youll Ever Read.