By Tom Bradley

One of the topics we’ve talked regularly about with clients and investor groups over the last year has been the perils of financial forecasting. We feel very strongly that investors should not make investment decisions based on short to medium-term market predictions. Nobody knows what’s going to happen. There are just too many moving parts – economy, product innovation, profit margins, interest rates, currencies, commodities, price-earnings multiples, credit spreads, capital flows, investor sentiment, regulatory changes, weather … I could go on.

I’m prompted to write about this topic again because of an excellent post by the Couch Potato (Dan Bortolotti) called "The Folly of Forecasts". He reviews some of the predictions made for 2014.

At Steadyhand, you’ll never hear us predicting where the market is going this quarter, this year or even over the next few years. That question usually elicits an “I don’t have a clue” response. What we do, however, is make rough, educated projections as to what asset class returns are going to be over the next 5 years. These ranges are meant to give clients a feel for what the investing environment looks like going forward.

We’ve been using the chart below to illustrate what we mean when we say the expected stock market return will be 5-7% per annum over the next five years. It shows what $100,000 will grow to if the 5-7% range proves to be correct ($128,000-140,000). More importantly, however, the chart makes it clear that “we don’t know” what path the market will take to get there.

If a friend, advisor or Steadyhand employee tells you to do something based on where the market is going to go over the RRSP season, turn around and walk the other way. The conversation is not going to help you make a sound investment decision.