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October 29, 2019
AllInvestingNewsRetirement
In the last year, interest rates have fallen dramatically. At the end of the 3rd quarter in 2018, the yield on a 10-year note from the U.S. Government was 3.05% and today it stands at 1.68%. This decline in interest rates is unusual, but not unprecedented. Given the vast resources of the world’s largest money managers, banks, insurance companies, and universities, surely someone saw this coming.
By and large no one did, and, unless we see a rise in yields in the fourth quarter, no one will be very close. The data above comes from the Wall Street Journal Economic Forecasting Survey. Each month, the WSJ surveys over 50 economists on a wide variety of things, one of which is what they expect the U.S. 10-year Treasury bond will be yielding at a future date. The chart shows what each economist predicted, versus what actually happened.
The difficulty in forecasting rates is well shown by looking at yields at the end of June. Nine months prior, the world’s leading economists’ predictions ranged from 2.75% to 3.94% with an average of 3.40% and a standard deviation of 0.28%. The actual yield on June 30th was 2.00% or 5 standard deviations below expectations. A 5 standard deviation variance should happen 1 out of every 3.5 million times, or effectively never, when events are normally distributed. This reinforces what we already knew: markets aren’t normal, and people can’t predict them.
As we’ve seen here with interest rates, it is very difficult to time markets, getting in or out at the right time to take advantage of the market’s next move. Smart and highly compensated people who work on large teams with unrivaled access to data spend all day trying to forecast the market. And still, they are wrong as often as they are right.
The best-case scenario for average investors trying to time the market is that it will insert an element of chance into their financial lives. For those willing to accept a materially less comfortable retirement for the chance at having a relatively lavish retirement, market timing may make sense. But that is not most people, and the universe of investors who try to time the market on average underperform for the following reasons:
The markets future movements are unknown, even to “experts.” Timing the market or picking stocks will usually hurt your wallet, not to mention the mental stress that comes with it. Having a long-term strategy and sticking with it is the best way to build wealth in the long run and to position yourself for an enjoyable retirement.
If you’re ready to start planning for a brighter financial future, Rockbridge is ready with the advice you need to achieve your goals.