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Economic predictions – don’t try this at home

Find out why trying to guess where the economy is headed could be bad for your investments.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The only function of economic forecasting is to make astrology look respectable.

The words of J.K. Galbraith, Harvard’s Professor of Economics for half a century – someone it’s fair to say knew a thing or two about trying to guess where the economy is headed.

In the short term, stock markets often move based on expectations about the economy. The UK stock market jumped after December’s general election victory for the Conservatives, given their pledge to push Brexit through. It's tricky to know exactly what will happen over the long term though. There’s still a lot to be agreed on the future of relations and trade between the UK and EU. No-one really knows what deal we’ll get. More importantly, no-one knows what impact it’ll have.

There are nearly always things happening in the economic and political arenas. It’s difficult to make investment decisions based on these uncertain events though, and almost impossible to do so with confidence. Even if you correctly predict the event itself, will you call the market reaction right?

Look at what happened after the UK referendum. Many people were surprised to wake on 24 June 2016 and learn the polls had been proved wrong and the UK had voted to leave the EU. Forecasters predicted UK economic turmoil, the collapse of sterling and stock market crashes. While the pound did fall and has remained subdued for much of the last three years, the economy has continued to grow and the UK stock market has generally kept rising after a brief wobble.

History repeating?

A similar thing happened on 16 September 1992, when the UK was forced to leave the European Exchange Rate Mechanism (ERM) – a day that became known as ‘Black Wednesday’. At the time the UK was in recession. The event was generally viewed as a national disaster and many feared the worst. However, after leaving the ERM, the UK economy recovered and began to grow, and, in a pleasing turn of events for investors, the UK stock market rose rapidly.

It’s also worth bearing in mind that the stock market is not the economy. So just because the economy is doing well or poorly, doesn’t necessarily mean the stock market will follow suit.

The financial crisis was a prime example. In 2008, when it began, the stock market fell by 29.9%. 2009 was an even worse year for the UK economy. Manufacturing was plummeting. Government borrowing was the highest it had ever been in peacetime. It was the worst year for the economy since 1921. Yet amidst all of this, the UK stock market had grown over 30% by the end of the year. Past performance is not a guide to the future.

The stock market is not the economy

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2019

What should investors do?

Unless you have a crystal ball we think it’s rash to change your portfolio based on predictions of how Brexit, US-China trade wars, currency swings or any other uncertain events will pan out. You might get it right, but there’s decent chance of getting it wrong.

Focusing on your long-term goals and having a balanced and diversified portfolio is a great way to prepare for whatever’s in store. That means a mix of investments around the world, in a diverse range of companies and with fund managers who invest differently.

It doesn’t guarantee your portfolio will be immune to short-term market shocks (sadly virtually nothing does). But it should give you peace of mind – something that’s hard to come by with the current news cycle. Please remember that all investments fall and rise in value, so you could get back less than you invest. This article is not personal advice. If you are unsure of an investment for your circumstances, please seek advice.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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