While it's fun to look ahead twelve months, it's the long term that counts.
I've read a stream of predictions for how stock markets and the economy will fare in 2010, and enjoyed every one. I've even written a few myself, and that was fun too. Being a complete hypocrite, I've also written articles warning about The Perils of Predictions, and enjoyed putting the boot into people who claim they can foresee the future.
It's that time of year. Everybody likes a bit of crystal ball gazing, everybody likes to pan the experts when they get it outrageously wrong, and most people have the sense not to take it too seriously.
But you can take the fun too far. The danger is that by focusing on the next 12 volatile months we will forget an important point about investing, perhaps the most important one of all: this is a long-term game.
It's only one year!
What happens in 2010 matters, of course, but only up to a point. It matters if, say, the global economy collapses again, wiping out trillions of pounds of wealth and setting the recovery back years.
It matters if you plan to put a big lump sum into the market, or take a big lump sum out, because short-term movements could cost you thousands of pounds. And of course it also matters for traders.
But for most investors, 2010 is just one year out of five, 10, 15 or 20 years. That's because you should be sticking your money away for a long time, to help you overcome any short-term volatility.
Time is on your side. Timing isn't. Trying to predict where the market will move in the next 12 months is a mug's game.
Of course, you and I will be much happier if stock markets surge ahead this year. But that's short-term gratification, and we are in this for the long-term.
China or Wayne Rooney. Who wins?
The other problem with focusing too firmly on the outlook for 2010 is that nobody knows what is going to happen. Is China a bubble about to explode? Will Japan get there first? Is the Brazilian samba over? Will central bankers fluff their stimulus exit strategy? Will we get inflation, deflation or stagflation? Will Greece sink the euro? Will Wayne Rooney's metatarsal survive the World Cup? Nobody knows.
That is why I got so pumped up about Bill O'Neill of Merrill Lynch in my article 2010 is going to make you rich, who is outrageously bullish about the prospects for 2010. How can anybody be so certain about something so uncertain?
Five seconds or five years?
Arguably, long-term predictions are actually easier to make. As anybody who has tried spread betting the FTSE 100 index will tell you, it's impossible to gauge where it will move in the next five minutes. And it's even harder over five seconds. In my experience, you will defy the law of averages by getting it wrong more than you will get it right.
It is the same with individual stocks. At the weekend, Questor tipped India-focused mining company Vedanta (LSE: VED). It wasn't to know that the company's shares would slide on Tuesday after the Chinese authorities took steps to calm its dizzying economy, sparking fears that this would hit demand for commodities. But it does know that over, say, five or 10 years, commodities probably have to be a good play.
I did say probably.
Over 10 years, I would expect oil and gas stocks to do well, as the world becomes more energy hungry, and peak oil moves ever closer (or recedes further into the past!), but I wouldn't have predicted that the oil majors would fall on Wednesday morning.
You can make a convincing case that the ageing population will boost pharmaceutical and healthcare stocks over the longer run. But what will be the GlaxoSmithKline (LSE: GSK) share price in the second week in May? Search me.
Look to the long term
Trevor Greetham, director of asset allocation at Fidelity, is looking well beyond 2010 to examine prospects for the next decade. He knows that markets in the last decade were as weak as during the two world wars, the great depression and the inflationary 1970s. And he sees this as a good thing.
He rests his case on the mean reversion theory, the phenomenon where a variable quantity tends to return towards its average value over time, despite fluctuations in between. It happened after those earlier traumas, and it will happen again, he says.
Returns in the 10 years after a 'lost decade', in which US equity returns are below the rate of inflation, average a healthy +11% a year in real terms. We would all be pretty happy if that did happen.
In the longer run, Greetham says valuation is the key factor. Stocks were outrageously expensive in January 2000 with an MSCI World price-to-book ratio of 4.2x. They hit a low of 1.2x in March 2009 and are currently trading at 1.8x. The average since 1975 is 2.1x.
Something can come of nothing
So by his measure, the next 10 years look pretty optimistic. Just as disastrous 2008 was followed by a triumphant 2009, the nil-growth noughties Could be followed by the tearaway teenies.
Of course, long-term forecasts can also go wildly astray. War, famine, pestilence, death and a Chinese property meltdown could deliver another lost decade.
But forget 2010 for a moment, and follow Greetham's example by looking a little further ahead, say, to 2020. Where do you expect stock markets to end up by then? The answer will say a lot about how you invest today.
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