In Perspectives

Now that the holidays are behind us, we find ourselves entering a new season:  it’s the time of year for annual market and economic forecasts.  Economists, financial analysts, and investment managers alike use the turn of the year to take stock of where we’ve been and make our best guesses as to what may be in store for us in the future.

As I look back at 2014 from the vantage point we have now, it is striking to me that many predictions that were made at this time last year by more or less a consensus of market participants did not come to pass.  Take the U.S. large cap stock market, for example.  After five years of a bull market and nearly three years of uninterrupted gains by the Dow and the S&P 500, many observers (including Legacy Trust) entered 2014 predicting the asset class was due for heightened volatility and a modest correction.  Needless to say, this did not come to pass – the S&P 500 again posted double-digit gains for the year, proving many of the experts wrong.

This is just one example, but it serves to illustrate a broader point:  while markets are ultimately driven by economic growth, and broad trends and cycles can be forecasted over longer periods of time, in the short run markets can move very quickly and be driven by any number of factors, many of which may have nothing to do with economic conditions.

Of course, none of this is to say that there isn’t great value in careful study of the economic trends and conditions that are likely to affect our investments in both the near and long term.  I think a key takeaway, though, is that the way that the story will play out in the market is very difficult to predict in the short run.  That’s why a well-diversified asset allocation strategy that does not rely on market timing is key to a long-term investor’s success.

The hallmark of a diversified portfolio is that at any given time, some asset classes will be in favor and some will be out.  Well-crafted economic and market forecasts play a key role in identifying opportunities and risks that skilled investment managers can tactically utilize, but the foundation of a high-quality diversified portfolio remains crucial to long-term success.