Trying to forecast market movements is fraught with danger. There is overwhelming evidence, academic and otherwise, that predicting market movements simply cannot be done.
As an example, a recent Eureka Report edition focused on the expected returns from the Australian sharemarket. The Eureka Report is an online magazine that I have a lot of respect for, and am a regular contributor to. The headlines were as follows:
Charlie Aitken: It's just Chicken Little . and another September buying opportunity
Patrick O'Leary: The ASX will be flat through 2007, and the sky might actually fall.
· The US fund manager: If there's no US recession, stocks will rally 25%.
· Shane Oliver: The savings glut is about to return ? that's good for shares.
There is a wide diversity of opinion there, from the sky is falling to a possible 25% return. One of the problems with forecasts is that one of them is likely to be right, and we tend to assume that is by skill and not luck. However, if there were 50 different opinions then one is likely to be correct, and the owner of that opinion will suddenly assume guru status - although dumb luck suggests some people have to get a forecast correct!
How do we incorporate these forecasts into investment portfolios? Simple - we don't try to forecast returns. The long run returns from growth assets - Australian shares, international shares and listed property trusts have all been around 12-13% a year. So exposing ourselves in a diversified way to all three asset classes will provide sound long term returns - without the hassel of worrying about short term forecasting, or the cost and tax inefficiency of buying and selling to chase forecasts.
