Will it rain on May 23rd, 2025? I have no idea. It may. Who knows. If it does rain, I’ll look smart. I have a 50/50 chance. It will either rain or it won’t. A major-league baseball player who hits safely 50% of the time and ends up with a batting average of .500 would be considered the greatest athlete of all time. An NFL place kicker who makes 50% of his field goal attempts will be fired.
Investors and media folk put their faith in stock analyst and treat their picks and price targets as Gospel even though they’re right only about 50% of the time. In a 2012 report from Nerd Wallet they found analyst who followed the thirty stocks in the Dow Jones Industrial Average were right in their stock picks 51% of their time.[1] In a deeper study from researchers at the University of Waterloo and Boston College they found analyst missed their price targets about 70% of the time.[2] Regardless, analyst continue to make bold stock predictions and investors continue to hang their hat on these guesses.
One way to beat the analyst and Wall Street at their own game is to own a basket of index funds. With an all index portfolio, you don’t have to worry about stock picks or price targets. With an index portfolio, you’ll have the opportunity to own companies all over the world with access to all the investment sectors.
There may be a conflict of interest for an analyst to recommend a stock they own but it has always surprised me when they don’t own one share of the company they’re flaunting. If an analyst was so sure a stock was going to climb 20% or more why not own a few shares themselves?
In a recent Wall Street Journal article about market predictions, analyst have prophesied about positive market returns every year since 2000 even though the stock market has fallen about a third of the time. The 2008 forecast from Wall Street strategists were pointing towards a positive year. In 2009, their outlook was dire.[3]
Can you succeed as an investor without analysts or Wall Street? I believe you can. A simple strategy is to own a diversified basket of low cost index funds.
The following portfolio generated an average annual return of 8.25% over the past twelve years. This year, through November, the portfolio is up 9.95%. Here is the all-equity portfolio[4].
- IVV – iShares S&P 500 Index.
- VO – Vanguard Mid-Cap Index.
- IJR – iShares S&P 600 Index.
- VNQ – Vanguard Real Estate Index.
- EFA – iShares MSCI EAFE International Index.
- EEM – iShares MSCE Emerging Markets Index.
However, this portfolio did miss the mark on occasion. During the twelve-year run, it had three losing years with a drop of 40.8% in 2008. It did rebound a year later with a return of 38.8% followed by a 19.4% jump in 2010.
As we move towards 2017 it may be time for you to adjust your New Year’s resolutions to focus on a low cost, diversified index portfolio. My prediction is that you’ll find it beneficial towards your long term financial health.
Never make predictions, especially about the future. Casey Stengel
[1] https://www.nerdwallet.com/blog/investing/investing-data/investment-stock-analyst-ratings-stockpicking-research-wrong/; Nerd Wallet, April 16, 2013.
[2] http://business.financialpost.com/investing/analysts-target-prices-rarely-accurate-global-study-finds?__lsa=4ddd-c96b; David Pett, March 7, 2013.
[3] Wall Street Journal, December 9, 2016; James Mackintosh
[4] Morningstar Hypothetical Tool. November 2011 to November 2016.