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Every time you turn around — and even when you’re sitting still — a big bank or investment firm issues a prediction. The financial media jumps on them like flies on you know what.
These predictions tend to come in two flavors.
The flavor of the day. Upgrades and downgrades to individual stocks. While they can be helpful, they should — quite often — have about zero bearing on what an everyday investor — people like you and me — does with a long-term stock.
It’s one thing to downgrade BlackBerry (BB) because Apple (AAPL) is about to crush it. This is less flavor of the day because it makes a prediction based on a long-term, writing on the wall trend. It’s entirely another to downgrade a powerhouse such as Microsoft (MSFT) because of a soft quarter. If anything, this type of downgrade should get long-term investors thinking about buying more on weakness.
If you’re a long-term, retirement investor who owns strong and stable growth (dividend and revenue/profit growth) companies, it makes zero sense to jump in and out of positions based on downgrades (or upgrades) that have nothing to do with structural changes in a space or at a company.
This is what we call noise. Ignore it in the day to day and you’ll be better off over the long haul, particularly if, here again, you’re saving for something like retirement.
If you are or want to be more of a short-term trader or investor, you know it’s difficult to pick individual stocks. You need an edge. And it’s not coming from these big banks and their upgrades and downgrades. You’re better off finding ways to leverage AI or technical analysis — with the help of people who know how to use these tools — than you are following the lead of the so-called smart money.
Because big bank, smart money, stock-specific and broad market predictions you often see tend to be flat wrong.
For example …
Annual broad market predictions. Our friends at WisdomTree (we really love their analysis) compiled a list of the predictions big firms made for the stock market’s performance in 2023.
Barclays said the S&P 500 would drop by 4.3%. Morgan Stanley, UBS and Citigroup predicted 1.6% of upside. Everyone else fell into an upward-sloping line until the most optimistic of the big money players, Deutsche Bank, forecast a 17.2% return for the S&P 500 in 2023.
Of course, the big banks have an incentive in guessing low, but not too low. They don’t want to be too bearish, as to discourage the inflow of capital to their funds and such. On the other hand, if they’re too optimistic, they look bad if things turn south and people lose money. Guessing low also helps them tout their performance if they outperform their own market predictions and what actually ends up happening.
What actually happened in 2023 was a 24.2% return for the S&P 500.
In any event, take the 2024 predictions with a grain of salt. JPMorgan thinks the market will fall by 12% on the bearish end, while Deutsche Bank remains the most bullish with its call for 7% of upside in the S&P 500 for 2024.
Touting its own focus on buying high-quality dividend payers, WisdomTree says:
Academics have demonstrated time and again that systematically investing in factor portfolios would have outperformed the market over the long term. Investing in high-dividend stocks, high-quality stocks or cheap stocks in a systematic manner gives investors one of the keys to potentially outperforming the market …
WisdomTree’s approach to quality, though, seeks to offer a very balanced mix with strong outperformance in high-volatility markets, helping to reduce drawdowns and time to recovery but also some outperformance in other volatility regimes. This combination is what we call “all-weather.” Such a strategy can be used as a strategic holding to put time in the market as it captures most of the upside while offering risk mitigation on the downside.
The Juice could not agree more. This is why we advocate long-term portfolios that mix broad market exposure, via passive, broad market-tracking ETFs, with a compounding strategy focused on high-quality dividend paying stocks. In forthcoming installments of The Juice, we’ll further expand on the particulars.
But this leads us to more noise that ties into WisdomTree’s point. When interest rates are high as they have been for a while, people talk down dividend stocks. You hear this on CNBC and see it in the financial media all of the time. Like an upgrade, downgrade or broad market prediction, this can influence what investors do.
You do you, but we think it’s erring on the side of fickleness and foolishness to dump dividend stocks because they might underperform for a couple of years. While you might never be able to live off of your dividend income, you are building wealth by staying the course in a dividend reinvestment strategy. Don’t let in-the-moment predictions break that powerful cycle.
The Bottom Line: Short-term investing requires an edge. You’re not getting that from the folks on Wall Street.
Long-term investing requires time to show tangible success. On your part, this requires patience. This is what makes these noisy predictions potentially dangerous. You see them repeated incessantly and they mess with your head.
So you sell a stock you had no business selling or veer from a strategy you should have never veered from. While these actions can make you feel like you’re doing something and maybe save you from some on-paper downside, they can also derail or slow down the slow process of wealth-building in your long-term, retirement-focused portfolio.
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