Knowing When to Fold’em

An “irrational quest for safety drove all kinds of nutty economic and investment behavior in 2011.” So said the Chairman and Chief Investment Officer of the brokerage firm, T. Rowe Price, a couple of weeks ago at a media conference in New York, as reported by Advisor One, an on-line investment newsletter for financial professionals.

He went on to say that “irrational thinking explains … why people are terrified of risk and volatility.” I can understand the frustration. When the markets take a downturn, many advisors and their investor clients sell their investments and park their money in cash. In other words, they sell when the market is low, and want to wait until prices rise before they get back in.

Isn’t this something like telling your spouse not to buy those Holiday Gifts if the prices are too low? Try to find something that went up a lot – preferably a whole lot – and buy THAT gift? If that is irrational behavior when you’re shopping for the holidays, wouldn’t it also be irrational behavior when applied to an investment portfolio?

The S&P 500 stock index opened for the year 2011 at 1257.

According to the Wall Street Journal this past weekend, the big banks and brokerage firms are now forecasting where they think the index will land on December 31:

* 1425 – Deutche Bank
* 1350 – UBS, JP Morgan
* 1325 – Citigroup, Openheimer
* 1270 – Credit Suisse
* 1260 – Barclays
* 1250 – Wells Fargo
* 1238 – Morgan Stanley
* 1215 – Bank of Montreal
* 1200 – Goldman Sachs
* 1130 – HSBC

As of the end of business last week (11/28/2011), the S&P 500 closed at 1192.55. Does this means that the forecasters at Goldman Sachs are right? And the other eleven forecasters are wrong? Who knows? We’ve got the month of December to see where things fall. Although somebody’s got to be close, it seems almost random, doesn’t it?

So, doesn’t this information just add to the confusion? How can all of the forecasting and technical analysis in the world possibly be used by financial advisors and their investors to successfully “beat the markets”? The answer is that it can’t.