Tony Blair once said: “I never make predictions. I never have and I never will.” That contradiction always tickled me. But we are all in the business of predictions, are we not?
Last week I attended a review meeting with a client and his appointed discretionary fund manager. The client was looking for some reassurance that his pension pot invested with that DFM and significantly exposed to equities might achieve a better return than that of the last 12 months.
As part of a wide-ranging conversation on the state of the world’s economies and markets we got to the predictions game. Using the FTSE 100 as a blunt instrument to determine what good and bad looks like, the DFM told the client he felt there was a real chance it could be at 5,000 or 5,500 by the end of the year.
Leaving aside the point there is quite a large gap between those two numbers, I wondered what the value was in that particular prediction. Sure the advice was reasonable: the client will not be accessing his pension pot for a decade or longer, so remaining invested made real sense. What is more, an equity price fall actually, to some extent, plays to his advantage, seeing as he is in the accumulation stage of his retirement planning.
But that is not the point. Are there not just too many variables for any kind of prediction of this type to have real meaning? Oil prices, Chinese inflation and consumption, UK membership of the European Union, US interest rates and another long, hot summer of Greek tragedy. Who knows what the short-term future holds?
What value is there to our clients in trying to predict the level of stockmarkets three, six or 12 months hence? In truth, most are investing for the long term so the level of the FTSE 100, blunt instrument that it is, really has little bearing on their future wealth.
I cannot think of one client whose portfolio is invested exclusively in equities, and absolutely none invested entirely in FTSE 100 companies. Every single one has a diverse portfolio containing multiple asset classes. More importantly, every single one is fully aware the value of those portfolios can fall as well as rise.
Trying to predict the level of an index is the start of a slippery slope to trying to time the market. I do not know about you but I take with a pinch of salt anyone who claims to be able to consistently do that. I subscribe to the view it is time in a market, not timing a market, that makes more sense.
So if I am asked to predict the future I am going to cover all the bases. Where will the FTSE 100 be in 12 months? I confidently predict it will be higher… or lower… or maybe even the same. But then I do not do predictions. Never have, never will.
Nick Bamford is executive director at Informed Choice