Evaluating Financial Forecasts: A Critical Review

Will this year be a good year for financial markets? The answer depends on whom you ask.

Every January, I review the predictions of "financial experts" for the preceding year and how they fared on stocks, credit, currency markets, growth and inflation. Once again, only a minority were "right" in 2005.

Unfortunately, some people base their investment strategy on these predictions and inevitably experience disappointment.

"Predictions are for show, while the coming year's ongoing portfolio shifts are for dough," says money manager Steve Leuthold of the Leuthold Group LLC in Minneapolis, Minn. "For it is the markets themselves that always seem to provide both unexpected opportunities and unanticipated risks."

Whether you are managing your own money or paying an adviser to do so, no one can predict which mutual fund or private money manager will outperform similar investments, particularly over periods of the next year or two. Those investors who are so focused on performance numbers over a short time horizon are most likely to make the big mistake of making a change at exactly the wrong time.

No one can reliably and consistently forecast the course of the economy, interest rates or markets. It is also impossible to predict, with consistency, which market sectors are ready to run and which are ready to flame out.

However, we can control nearly all our lifetime returns through four decisions.

First - have and maintain a well-diversified portfolio.

Second - own equities in your portfolio. The real long-term risk of equities is not owning them.

Third - don't panic. Many people invest based on fear or greed. It is human nature itself that renders many people incapable of succeeding on their own. Experienced investors distinguish between temporary fluctuations in the market and permanent losses.

Last, but not least don't try to time the market. Instead, develop an asset allocation strategy based on your own tax situation, risk tolerance, expected return, asset allocation preferences and, most importantly, your time horizon.

In making your financial resolutions for 2006, your goals should be specific, measurable, achievable and compatible. Here are a few areas you may need to address.

Increase your savings. Unlike years ago, most people will not have a pension at retirement. In Japan, individual savings rates are in double digits. Unfortunately, the U.S. savings rate has been declining and is minimal at best according to recent studies. Saving NOW for your future is crucial. Pay yourself first and increase your savings rate by at least 1 percent each year.

Pay off debt. The average credit card debt per household is estimated at $9,312, according to cardweb.com. Interest rates are now higher for those with home and equity loans or adjustable rate mortgages. Develop a plan of action and focus on paying off your debt.

Review your insurance. Whether it is life, property & casualty, or long-term care insurance, now is a good time to review what you own. Are you over- or under-insured? If the hurricanes have taught us anything, it's to make sure you have enough. Is it still the right kind of insurance you need" Are you paying too much" Take the time to look at what you own and evaluate whether it still makes sense for your situation.



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