Keeping an open mind on New Year predictions
BEING the start of the year, financial predictions for economic growth, share and property market returns for 2013 start to appear in every corner of the media by economists, money managers and market commentators.
Over the Christmas period one such prediction was made by a leading US real estate analyst Jordan Wirsz, who was reported as saying Australia is heading towards a property crash.
He made the prediction that prices will fall as much as 60% in some areas as the global economic downturn spreads to China and eventually here.
Early 2012 visiting US economist Harry Dent said Australian house prices were 50% overvalued, based on factors such as historical price levels, and the differential between Australian property prices and overseas prices.
However, I don't share the opinions of these individuals to the degree stated, for a number of reasons.
Our bankruptcy laws are very different and our banking industry is much more highly regulated than the US where our laws make it harder for individuals to walk away from their housing debts.
But it does highlight how predictions like these of economic woes will often delay investors from making decisions.
The world's great investors have placed little emphasis on short term economic and market predictions, instead focusing on the prospects for individual companies and industries.
This time last year I wrote that the Australian share market was trading at relatively inexpensive levels with attractive dividends, yet throughout 2012 terms such as fiscal cliffs, European debt issues hit the headlines leaving some investors on the sidelines.
In the end the Australian share market rose and went on to deliver returns of over 14% and when you add in dividends investors would have received very healthy returns.
This shows that following market predictions, or getting overwhelmed with media reports and market noise can often lead to inappropriate investment decisions.
Warren Buffet, one of the world's richest investors once said: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
Making emotional approaches to investment selection is usually one of the worst decision-making frameworks.
Jason Mcfadden is a certified financial planner with JPM Financial Planning. This editorial is general advice only.