It’s the time of year when all the talking heads, prognosticators, economists, and other soothsayers are coming forth with their projections of what is to come in the New Year.  The idea is that if we follow their guidance, our portfolios will surely outperform the market; we’ll all be rich and live happily ever after.

As a passive asset manager, I don’t believe that anyone can consistently predict what will happen in the markets.  We avoid any type of market timing or security selection, because those are subject to factors we cannot control.  So, for educational purposes, I started running a little experiment.  At the end of last year I saved the predictions from several of the experts, so that I could look back and see how they did.  The results of my non-scientific test further cement my decision to keep on as a passive manager. 

Here’s what I found:

One of the largest money managers in the world, in an article entitled, “2011: A Look Ahead” presented 10 predictions for the year ahead.  Let’s see how they did:

• “US growth accelerates as US real GDP reaches a new all-time high.” 
  • They missed on this one.  The growth that we saw at the end of 2010 did not continue in 2011.  We saw a 0.4% increase in the 1st quarter, 1.3% in the 2nd, and 1.8% in the 3rd.  Hardly an all-time high.
• “The US economy creates 2-3 million jobs in 2011 as the unemployment rate falls to 9%.”
  • They were close on this one. The economy created about 1.5 million new jobs and the unemployment rate closed the year at 8.6%.
• “US stocks experience a third year of double-digit returns for the first time in more than a decade as earnings reach an all-time high.”
  • Not even close.  The S&P 500 index finished 2010 at 1257.  As I write this, with about 5 hours left in the last trading day of 2011, the index is at 1262.  Basically flat for the year.
• “Stocks outperform bonds and cash.”
  • They missed this one too.  S&P 500 and cash—flat; A Merrill Lynch index of Treasury bonds returned 9.6%.
• “The US Stock market outperforms the MSCI World Index.”
  • They got this one right.  S&P 500—flat; MSCI World Index down over 6%.
• “The United States, Germany and Brazil outperform Japan, Spain, and China.”
  • All over the map on this one.  Here are the numbers:  US—flat; Germany—down 11%; Brazil—down 22%; Japan—down 12%; Spain—down 8%; China—down 15%;
• “Commodities and emerging market currencies outperform the US dollar, the euro and the Japanese yen.”
  • Wrong again.  A broad based commodity index was down 10% for the year.  The US dollar gained against most developed and emerging market currencies.
• “Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions and business reinvestment.”
  • They nailed this one.  With billions of cash sitting on the books of major corporations, the merger and acquisition environment was strong, led by energy, healthcare and tech sectors.  Lots of companies also increased their dividends.
• “Investor capital flows from bond funds to equity funds.”
  • Missed again.  According to the Investment Company Institute, stock mutual funds showed net outflows of more than $300 billion through November.  Bond funds increased by about $200 billion.
• “The 2012 Presidential campaign sees a plethora of Republican candidates while President Obama continues to move to the political center.
  • The Republicans have certainly had a plethora of candidates, but I’m not so sure you could say that President Obama has moved to the political center.

So, the scorecard would read that they missed 6 or 7 out of 10.  Not exactly confidence-inducing.   What about some of the other experts?

Laszlo Birinyi, who was one of the first to advise buying stocks near the bottom in March 2009 predicted that the S&P 500 would rise to 1333 this year.   He was right, and wrong.  The index rose as high as 1356 in May before the European summer sent it to as low as 1100.  As mentioned earlier, it’s currently at 1262.

Fidelity Investments published a report, “5 Experts: 2011 Outlook.”  How did they do? 

The Director of research for the Global Asset Allocation team didn’t exactly go out on a limb, but predicted a higher US market.  Didn’t happen. 

The Director of Global Macro Strategy was bullish on stocks, gold, foreign stocks and currencies, and bearish on Treasuries and the US dollar.  With the information I’ve provided earlier, I would call this a zero-for-six record on the year.

One of their leading Portfolio Managers said “Stocks should trump bonds.”  He missed that one.  He also said that small stocks would lead large company stocks.  He’s oh-for-two.  Large stocks, as represented by the S&P 500 were flat.  Small stocks, represented by the Russell 2000, were off about 5% for the year.

Another Portfolio Manager said that “relative to fixed income, stocks seem like a good position to me.”  Wrong again.

And the final expert, another Portfolio Manager finally got one right for the Fidelity team.  He expressed concerns about a number of areas, but summed up his position by saying that “the many government and market uncertainties and risks that exist can be mitigated and dampened by diversification.”  He got it!

So, once again the lesson here is that even the experts can’t predict what’s going to happen in the markets, so why should you try?  Manage your portfolio by diversifying across several asset classes, keep your costs low and only trade when market movements require you to rebalance to your original allocation.  That’s how we do it.

And don’t worry… I’ve been saving all the predictions for 2012 that have been popping up over the last couple of weeks.  We’ll see how they did this time next year.

Happy New Year!