It’s that time of the year when many well-respected financial commentators offer their outlooks for the coming year. While this crystal ball gazing is always entertaining, it becomes even more so a year later.
If you think back a year, you will recall that the politicians in Washington were in the grip of one of their “fiscal cliff” stand-offs. The theatre of brinksmanship kept everyone guessing until a last-minute resolution.
For some, the excitement was just too much. The publication Financial News told its readers that “political storm clouds loom over the global economy”. The Economist magazine predicted for 2013 that “it is hard to believe this will be a bumper year for returns”.
The skepticism was universal. The Australian Financial Review quoted analysts as saying the prospect of rising bond yields and slowing profit growth did not augur well for a repeat of the positive performance of share markets seen in 2012.
It’s easy to see why many investors might have taken fright at the developments around the turn of the year and reduced their exposures to shares because of what the commentators were saying.
That would have been a shame because as of early December 2013, many global equity markets were notching up record-breaking years. In local currency terms, the US S&P-500 total return index was up by just under 29% at time of writing, on track for its biggest annual gain in more than a decade.
In Japan, the Nikkei 225 total return index was 53% higher as of early December, heading for its best yearly gain since 1972. In the UK, the FTSE 100 total return index was still nearly 15% higher for the year by December. These changes are in local currency terms.
Even in Australia, where an end to the mining boom and a strong local currency have triggered an economic slowdown, the local market as measured by the S&P/ASX 200 accumulation index was still up 15% by December, having hit 5-year highs in September.
As the year comes to an end again, there are still plenty of gloomy stories to fill the newspapers – including ongoing speculation of what happens when the US Federal Reserve begins tapering its monetary stimulus program.
This isn’t to say these stories are necessarily incorrect. Most of them accurately reflect the sentiment prevailing at the time they were written and the uncertainty about the future.
But as an individual investor, there is not much you can do about that. These expectations and uncertainties are already built into the market. Investing is about what happens next. We don’t know what happens next. That’s why we diversify.
And think about this. If any of the gurus who regularly offer their predications really had a crystal clear view of the future, why would they bother sharing it with the world?
It makes more sense to focus on what’s in your own control – and that’s your overall financial strategy which is designed to save you tax, deliver sound risk-adjusted returns, and build you wealth over time.
And if you don’t have a financial strategy, maybe you could treat yourself to one in the new year.
In the meantime, many happy returns!