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Want to Lose Your Money? Listen to Millionaires.

Along with anybody else who attempts to forecast the investment future.

An illustrative image of John Rekenthaler, vice president of research for Morningstar.
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A Failed Prediction

In November 2022, CNBC asked 761 people who owned at least $1 million in investment assets how stocks would perform during the next year. Fifty-six percent of them responded that U.S. equities would lose at least 10%. Over the previous half-century, stocks had declined by that much only 6 times. Either most of the survey’s participants were unusually insightful, able to predict an event with a 12% probability before it occurred, or they were blithering idiots.

Hmmm. About that. What’s more, the last time that the poll’s respondents were so bearish was in 2008. Which gives the millionaires a perfect record. Whenever they heartily dislike stocks, U.S. equities promptly gain 26%.

Problem #1: Recency Bias

Admittedly, the survey was unscientific. How CNBC selected its 761 participants from among the several million possibilities is unclear, but given that the questions were administered online, the result is unlikely to pass academic muster. Besides, most people realize they cannot predict equity returns. Ask the question and they may respond. However, that doesn’t mean that they truly believe their answers.

Nevertheless, the exercise was revealing. As with all endeavors, investment predictions are strongly affected by recency bias. After a well-publicized plane crash, airline travelers become warier, with their fears gradually dissipating along with the memory of the accident. Consumers are fonder of large SUVs when gas prices are depressed than when they are spiking. And when asked about the stock market’s prospects, retail investors are gloomiest after bear markets.

Problem #2: Group Think

For the most part, professionals avoid such errors. Almost all attended business schools, where they were instructed to avoid recency bias. Also, given the difficulty of making such forecasts, discretion quickly becomes the better part of valor. Their predictions are therefore much steadier than the millionaires’ outlooks. Entering 2023, the median projection among 20 Wall Street firms was that the total return for the S&P 500 would be 4.5%—slightly more conservative than usual, but much above what retail investors guessed.

Where professionals run into trouble is with economic forecasts. They are also expected to provide those, and with that task they do not duck the challenge. When asked in October 2022 about the following year’s real gross domestic product growth, Wall Street strategists gave a median answer of a puny 0.20%. Only 11 of the 78 respondents predicted a growth rate that equaled or exceeded the 50-year annualized average of 2.6%. Which, in fact, is pretty much what 2023 will record.

Consequently, those who used the economic predictions to guide their investments almost certainly suffered for that decision. Typically, the arrival of a recession is accompanied by bond market strength and stock market weakness, albeit with relatively good showings from recession-resistant equities: consumer staples, healthcare, and utilities. In 2023, the opposite occurred. Long bonds struggled to break even, while equities soared. Conspicuously absent from the stock market rally, however, were businesses from those defensive sectors.

To some extent, the economists’ fears were justified. An inverted yield curve caused by rising short-term interest rates, as was the case entering 2023, usually presages a recession. But professional economists are paid to anticipate the exceptions. That so few did owes to the same reason that they missed 2021′s inflationary spike. Collectively, they had their eyes on what others were saying. Their analyses were not entirely independent because of group think.

Problem #3: Wishful Thinking

A long-standing joke of my former boss, Don Phillips, is that portfolio managers inevitably comment that the previous year was dominated by a single simple trend. You will now hear that making money in 2023 merely required owning the “Magnificent Seven”: Alphabet GOOGL, AMZN, Apple AAPL, Meta Platforms META, Microsoft MSFT, Nvidia NVDA, and Tesla TSLA. Whereas profiting in 2022 meant avoiding both stocks and bonds, because the Federal Reserve was stifling each marketplace by increasing interest rates. Buying growth stocks sufficed in 2021. And so forth.

Thus, Bank of America’s investment strategists currently claim that 2024 will be a “stock picker’s paradise.” Meanwhile, BlackRock’s chief investment officer of global fundamental equities (the company’s active-management group) says that 2024 is shaping up to be a “bonanza” for “stock pickers,” and Leon Cooperman states that we are entering a “stock picker’s market.” Toronto’s Dennis Mitchell claims the same for the Canadian marketplace.

No doubt there is actual analysis intermixed with the wishful thinking—but don’t overlook the powerful influence of the latter. It is for that reason that I routinely discount forecasts of economic booms from growth-stock managers and economic busts from bond-fund leaders (case in point: Bill Gross’ downbeat prognosis of a slow-growth “New Normal” that would allegedly depress equity returns, made just as stocks entered a huge bull market), along with complaints about overpriced stock markets from those who run value funds. In the words of the philosopher Paul Simon, “a man hears what he wants to hear.”

Why Bother?

It is at this point where I might be expected to wag my electronic finger and counsel investors to ignore forecasts. That I will not do. For one, the admonition would be hypocritical, as I partake. For another, if consumed appropriately, investment predictions can be quite useful. The key is to follow their arguments rather than their advice. Understanding the logic behind the prophecy is an excellent way of learning more about both investments and the general economy.

For example, when I studied for my MBA degree, I skipped the macroeconomics requirement, although I had never taken an economics course. (Such are English majors.) No worries. After reading several hundred market forecasts, I had thoroughly learned the material. Along the way, I had also absorbed the initial lesson of the university’s investments class—the difficulty of outguessing efficient markets. How right that was.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

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About the Author

John Rekenthaler

Vice President, Research
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John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar's research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for and Morningstar magazine.

Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.

Before his role at Morningstar Associates, he was the firm's director of research, where he helped to develop Morningstar's quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

Rekenthaler holds a bachelor's degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.

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