The inevitable folly of forecasting

The inevitable folly of forecasting

SEI has released several papers in recent weeks on the importance of staying committed to a strategic investment portfolio even when markets are experiencing downside volatility.

In this commentary, we provide additional evidence to support this view while also acknowledging some nuances involved in market forecasting and active adjustments to (and within) a strategic asset allocation.

Predicting the future is hard

You may have heard an apocryphal quote along the lines of "It's difficult to make predictions, especially about the future." It's been attributed to writer Mark Twain, Nobel physicist Niels Bohr, baseball player Yogi Berra, and many others, but according to quoteinvestigator.com, it appears to have first appeared in the writings of a 20th-century Dutch politician.¹

While the origin story of the quote is not directly relevant to this discussion, it does provide another good example of the "Information Age" sometimes being anything but. What is relevant is its assertion, albeit tongue-in-cheek, that trying to predict the future is, like most domains of human judgment or decision-making, an incredibly error-prone exercise. There is rich literature, especially in the field of psychology, that has established and tried to model the various factors that make people and organizations prone to errors, while also exploring various methods for how we might better manage the cognitive and emotional biases underlying human fallibility. When it comes to predicting the future, we have an innate tendency to believe we can discern meaningful patterns in our environment and make sound inferences, predictions and decisions based on them², but even professional forecasters are prone to wide differences in judgment and produce forecasts that rarely, if ever, prove accurate. However, there is some room for nuance, and we'll close by discussing the role that judgments about the current and future states of economies and markets can play within a strategic portfolio when the risks and expense of such activities are acceptable to an investor.³

Why does forecasting skill matter?

As we've argued in recent papers, the discomfort that arises from financial market volatility can understandably cause investors to react in ways that are more likely to undermine, rather than support, financial success. While it should be obvious that panic and loss avoidance are poor grounds for making decisions, much less wholesale changes to an investment strategy, even sober-minded professional forecasters are rarely, if ever, correct about the future. Let's look at historical annual earnings and year-end price forecasts for the S&P 500 Index of large-cap U.S. stocks as an example. As the table in Exhibit 1 shows, the market almost never ends up where aggregate survey forecasts predict.

Index definitions

The S&P 500 Index is a market-weighted index that tracks the performance of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market.

¹https://quoteinvestigator.com/2013/10/20/no-predict/, accessed 30 April 2025.

²If you'd like to try to impress family, friends or colleagues, the technical term for this bias is apophenia, but be warned-some psychologists refer to the haphazard use of technical jargon as the illusion-of-explanatory-depth bias.

³While there are nuances, it's important to keep in mind that the strategic asset allocation decision is the overwhelming determinant of the investment experience even when active management is employed within the portfolio. See, for example, the 1986 paper, "Determinants of Portfolio Performance" by Gary P. Brinson, L. Randolph Hood and SEI's Gilbert L. Beebower.

⁴It's also worth noting that strategists often change their year-end market forecasts during any given calendar year as they incorporate additional information.

Performance in USD-Past performance does not guarantee future results.

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

There are risks involved with investing, including loss of principal. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Investment may not be suitable for everyone.

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