1. Portfolio
Perspectives
February 2013
Predictions of Uncertainty
Twelve months and a million headlines later, we can now see these
professional guesses for exactly what they are. Slow economic
By Joni Clark, CFA, CFP® growth, debt concerns, dysfunctional politics and a troubled euro
Chief Investment Officer, Loring Ward zone could not stand in the way of financial markets this year.
The U.S. stock market bounced back even in the face of much
negative news and uncertainty, and the S&P 500 Index finished
What is the stock market going to do over the next year? And how up a healthy 16% for the year. Yet, more than 65% of investment
about the economy? Wouldn’t it be great to know in advance? managers benchmarked to the S&P 500 Index failed to beat it in
2012.2 Perhaps they spent too much time listening to the gloomy
At the end of every year, Wall Street prognosticators look into predictions.
their crystal balls and try to answer these questions.
The region of the world that was considered the worst place to
If you are confused about which prediction to heed for a good invest at the start of 2012 was Europe because of their severe
estimate of this year’s returns, don’t worry — the data suggests debt crisis and the potential breakup of the European Union.
you’d be better off flipping a coin.
Another 2012 prediction that failed was the potential collapse
With Wall Street strategists’ dismal track record of predicting of the Euro, which was widely publicized in the financial media
the future, it is hard to see why they even bother to try. as “the Grexit.”
Since the turn of the century, the average yearly prediction has “Greece will begin official negotiations to exit the Euro…
been off by more than 10%, according to data from Bloomberg. — The International Business Times (December 22, 2011)
That almost matches the average market rise or fall over the
same period!1 Money managers who bet against the conviction of European
leaders to hold together the 17-nation currency union missed
Their accuracy in predicting the markets in 2012 was no better. out on some of the best investment opportunities.
Predictions were overwhelmingly negative, and many predicted
another lackluster year for stocks in 2012 based on continued Although much of the financial news in 2012 highlighted Europe’s
troubles in the global economy. fragile financial health, the euro zone did not fall apart. The MSCI
Euro Index delivered a stunning stock market return of 23% for
“The S&P 500 will fall 7.2% for the year.” the year. In fact, most of Europe’s individual country markets out-
— Adam Parker, U.S. stock strategist at Morgan Stanley performed the U.S. Only Europe’s PIIGS (Portugal, Italy, Ireland,
“The U.S. stock market will end slightly up for the year…another Greece and Spain) produced returns below the U.S., and even
lost year like this one.” these troubled country market returns were positive, ranging from
— Forbes Magazine (December 21, 2011) 4.73 to 13.46%.
Financial Times, December 7, 2012, “Investing Forecasts Omit Key factor — Luck.”
1
“Almost All of Wall Street Got 2012 Market Calls Wrong,” www.bloomberg.com/news/print (January 4, 2013)
2

2. Portfolio Perspectives
Contrary to all of the negative predictions for 2012, stock market Turkey, Egypt and the Philippines were the top performing country
returns were strong across the globe. markets. Would you have guessed that going into 2012?
How Can Economic Strategists And Financial
2012 Index And Country Performance Analysts Get It So Wrong?
Total Return (US$Dollar/Gross Dividends) for 12-Month The future is unknowable to all of us. Predictions are nothing
Period Ending December 31, 2012 more than a game of chance or a professional guess.
WORLD 16.54% 22. SWITZERLAND 21.47% Successful forecasting is about predicting both what will happen
WORLD ex USA 17.02% 23. NETHERLANDS 21.21% AND how the markets will react to those events. That’s a tough
EURO 22.99% 24. PERU 20.24% challenge for the best of financial professionals.
EMERGING MARKETS 18.63% 25. NORWAY 19.70%
1. TURKEY 64.87% 26. SOUTH AFRICA 19.01% Since markets react quickly to new information, any developing
2. PHILIPPINES 47.56% 27. TAIWAN 17.66% economic news is important to stock prices only if it is differ-
3. EGYPT 47.10% 28. FINLAND 16.50% ent from the information and expectations already reflected in
4. POLAND 40.97% 29. USA 16.13% market prices.
5. BELGIUM 40.72% 30. UNITED KINGDOM 15.30%
The reality is that we live in an uncertain world, and uncertainty
6. COLOMBIA 35.89% 31. RUSSIA 14.39%
7. THAILAND 34.94% 32. MALAYSIA 14.27%
(while uncomfortable) is a natural part of investing. It is rare
8. GERMANY 32.10% 33. ITALY 13.46% for us to have the luxury of being sure of anything — with or
9. DENMARK 31.89% 34. CANADA 9.90% without predictions from the so-called experts.
10. SINGAPORE 30.99% 35. JAPAN 8.36% In our quest for certainty, some of us may be tempted to make
11. NEW ZEALAND 30.38% 36. CHILE 8.34%
changes to our portfolios based on financial headlines or market
12. MEXICO 29.06% 37. IRELAND 6.29%
forecasts, but in most cases we would be better served to stay
13. HONG KONG 28.27% 38. GREECE 5.73%
14. AUSTRIA 27.02% 39. INDONESIA 5.22%
focused on our long-term investment strategy and avoid impulsive
15. INDIA 25.97% 40. PORTUGAL 4.98% moves based on hunches about the future.
16. SWEDEN 23.41% 41. SPAIN 4.73% Stock market predictions are about as dependable as the horo-
17. CHINA 23.10% 42. CZECH REPUBLIC 3.48% scope — so let’s not rely on them in 2013.
18. FRANCE 22.82% 43. BRAZIL 0.34%
19. HUNGARY 22.79% 44. ISRAEL -3.91% As the legendary economist, John Kenneth Galbraith put it,
20. AUSTRALIA 22.30% 45. MOROCCO -11.48% “The only function of economic forecasting is to make astrology look
21. KOREA 21.48% respectable.”
Fortunately for all of us, astrological predictions of the end of the
Past performance is no guarantee of future results. Indexes are unmanaged world based on the Mayan Calendar also got it wrong in 2012.
baskets of securities in which investors cannot directly invest; they do not
While the ongoing news headlines can be worrying for many
reflect the payment of advisory fees or other expenses associated with specific
people, it’s important to remember that by the time you read
investments or the management of an actual portfolio.
about it in the newspaper, the markets have already absorbed
MSCI data copyright MSCI 2013, all rights reserved.
that information and have moved on to something else.
Even with a solid return of 16%, the U.S. ranked only #29 The good news is that we don’t need to be able to forecast the
(or #25 in local currency terms) of 45 individual country mar- market to have a successful investment experience. Instead, we
kets returns for the year. Twelve country markets generated an need a disciplined and diversified “all-weather” portfolio strategy
annual return in excess of 25%! In fact, only two of 45 country that does not fall apart when the markets don’t perform well in
markets posted negative returns for the year! any given year.
Past performance does not guarantee future results and the value of an investment will fluctuate so that an investor’s shares, when redeemed, may
be worth more or less than their original cost. Stock investing involves risks, including increased volatility (up and down movement in the value of
your assets) and loss of principal.
© 2012 LWI Financial Inc. All rights reserved. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities
transactions may be offered through Loring Ward Securities Inc., an affiliate, member FINRA/SIPC. B13-011 (Exp. 1/15)