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Two Predictions You Can Take to the Bank

05/05/2015 05:01 pm ET | Updated Jun 27, 2015

Most predictions are utter nonsense. They're made by self-styled "gurus" who are really emperors with no clothes. If they are right, it's due to luck and not skill (although they are quick to claim credit). Warren Buffett's view of those who pretend to have the ability to predict the future is spot-on. He famously stated:

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."

While investors routinely laud Buffett for his legendary investment expertise, they often ignore this wise admonition.

There are, however, exceptions to his rule. Here are two predictions, based on solid, historical evidence. You can take them to the bank.

Your expectation of market returns will not be met.

Many investors believe the stock market (which they often equate with the S&P 500 index) has yielded returns ranging from 8 percent to 10 percent a year. Their expectation is that their annual returns will be in this range. They are likely to be disappointed.

In the past 89 years, the S&P 500 index never posted total returns in this range, although the average return was indeed between 8 and 10 percent. Beginning in 1926, there have been 28 years with returns that significantly deviated from this range. In those years, there were gains or losses in excess of 25 percent.

If you are expecting returns this year between 8 and 10 percent, you are likely to be disappointed.

You will be tempted to time the market.

It would be great if you could always buy at the bottom and sell at the top. And much of the financial media lures investors into believing that someone has the expertise to tell them how to time the markets. The temptation to do so is particularly great in a long bull market. After all, it seems clear that a market correction is inevitable. It's hardly a leap in logic to follow the advice of "those in the know" and "flee to safety" before the other shoe drops. Right?

The "gurus" dispensing market-timing advice often have stellar credentials and brilliant-sounding rationalizations for their opinions. It's no wonder that many investors act on their advice, often to their own detriment.

In January 2014, The Wall Street Journal published an article entitled "The Bull Market: Long in the Tooth" by well-known pundit Mark Hulbert. Mr. Hulbert looked at 35 bull markets since 1900. He ominously noted: "The U.S. stock market is more overvalued than it was at the majority of the past century's peaks, according to six well-known valuation ratios." While he hedged his dire prediction of a market correction by observing that this "doesn't mean the bull market is coming to an end," he also warned that "the evidence suggests that risks are high." He advised investors to consider "selling some of your stock holdings and building up cash."

The performance of the stock market in January 2014 appeared to validate Mr. Hulbert's views. The S&P 500 lost 3.5 percent. The Dow Jones Industrial Average (DJIA) was down 5.3 percent. The financial media went into overdrive, doing what it does best: stoking fear and anxiety.

The Wall Street Journal piled on. An article the following month by Jon Hilsenrath examined a number of impressive "indicators," which he concluded sent a "signal" of big trouble ahead. The article quoted a Harvard economist who warned: "Maybe the U.S. will not have the solid year everybody had been expecting." Mr. Hilsenrath made a compelling case that a series of "unfavorable events" changed "bright optimism" into "a deepening sense of doubt."

I suspect many investors who read this erudite analysis of depressing world events, which was coupled with a falling stock market, dumped their equities.

They had no way of knowing that the market had, in fact, bottomed out. The S&P 500 index rose a whopping 19 percent between Feb. 3 and Dec. 31, 2014.

I have a third prediction, which I hope turns out to be inaccurate.

Many investors will continue to engage in conduct that enriches their brokers and depletes their assets, like stock-picking, market-timing and investing in actively managed mutual funds.

I hope you will be the exception.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham. He is a New York Times bestselling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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