Broker Check
Accuracy Check: Forecasts

Accuracy Check: Forecasts

| March 02, 2023
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In Nebraska, we’ve all heard the saying “if you don’t like the weather, wait 5 minutes”.  Often, it seems like nobody can predict the weather here with any kind of reliability.  Have you ever thought, “how on earth does a weatherman get paid to be wrong SO much of the time”?  While it may seem like to us that they get it wrong more often then not (because when they're wrong it's tangibly obvious), studies have actually shown that meteorologists predict a 5 day forecast with 90% accuracy.  As the time frame gets further out, the accuracy goes down however, with a 10 day forecast being accurate only 50% of the time.1

Contrast that with stock market forecasters.  These are analysts that typically work for large financial institutions or major news media outlets.  They study market charts and movement patterns and make predictions about how the market will move in the future.  When we see a headline that says “John Smith of Big Name Bank says the NASDAQ will go down another 40% before it bottoms out” we think, “Well, they’re an expert so they probably know what they’re talking about”.  In reality – their track record is FAR worse than any weatherman’s.  In fact, studies have shown that these “expert” market forecasters are right less than 50% of the time!2  Yet their bad predictions just disappear into the news cycle and new ones filter in without a thought of accountability.  These shotty predictions can influence people to make fear based financial decisions that can be lethal to their portfolio!  That’s much more serious than getting caught in the rain without an umbrella.

Here’s the good news.  Unlike the weather, which gets more unpredictable the further out you look, the performance of the stock market actually gets more predictable with time.  While nobody can accurately predict the short-term performance of the stock market, the odds of reaping a positive return over a 5 year or longer time period are very good.  Take a look:

Moral of the story: Weather forecasts are more accurate than market predictions.  Invest for long-term success, not a short-term gamble!


Resources:

1 https://scijinks.gov/forecast-reliability/#:~:text=The%20Short%20Answer%3A,right%20about%20half%20the%20time.

2 https://www.kiplinger.com/article/investing/t038-c000-s002-which-market-gurus-get-it-right-the-most.html

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