"If you must forecast, do it often."

According to legend, this is what young market prognosticators are told. With frequent forecasts, modifications can be made. The forecaster will never be confronted with one particular forecast, carved in stone and hideously wrong.

Another bit of survival advice young forecasters are given is that they can predict a time or an amount. But they must never predict both. It sounds good, for instance, to bravely predict the Dow Jones Industrial Average will hit 36,000 at some time in the future. (You might even write a book about it.) But you can't be too specific about when this will occur.

One reason is that someone is bound to check up on you.

Rex Thompson, a Professor of Finance at Southern Methodist University, did just that while pondering how much people should worry about their asset allocation. (If the phrase makes your mind go blank, asset allocation is how you divide your money between stocks, bonds, and cash or other classes of assets.) In his view, we shouldn't think too much or too often about this subject. Nor should we take the suggestions of experts very seriously.


Forecasters tend to be wrong. "The pattern emerged in the mid-nineties while I was doing an asset allocation exercise with a class," Professor Thompson said in a recent telephone interview. Using a listing of experts and their suggested asset allocations, he found that they often suggest more stocks when the market was about to decline. Then they suggest more bonds when stocks are about to do well.

His supporting evidence comes from a study of asset allocations made by top market strategists over nearly ten years. Their allocations were collected and duly reported. Going back to 1993, Professor Thompson averaged the allocations to come up with a consensus view for the coming year. "If an average is a productive enterprise, there should be something in the average," Professor Thompson commented.

But there wasn't.

"There is a statistical correlation, but its negative when it should be positive," he observes.

Early in 1994 the consensus view was that investors should be 62.3 percent committed to equities. Early in the next year, however, the consensus view reduced the commitment to stocks. The recommended allocation for 1995 was only 52 percent stocks.

Guess what happened?

Stocks had their best year for the decade, soaring 37.4 percent.

The same thing happened, in reverse, in 2001. In that year the consensus of the experts was that stocks would do well. They increased the allocation from 60.6 percent to 68.0 percent. In fact, the S&P 500 declined 11.9 percent in 2001.

While most years had smaller changes in allocation, Professor Thompson found that the experts were going in when they should have been out--- and out when they should have been in. (A table showing the allocations over the past 9 years is shown below.)
The Record for Expert Asset Allocations, 1993-2001
Asset Allocations % Returns for the Year
Year Stocks Bonds Cash S&P500 Int. Gvt. Tbills
2002 69.2 22.3 7.4 Na Na na
2001 68.0 23.4 8.4 -11.9 8.1 3.5
2000 60.6 28.9 9.3 -9.1 12.6 5.9
1999 61.9 30.1 6.9 21.0 -1.8 4.7
1998 60.0 29.0 7.0 28.6 10.2 4.8
1997 58.0 31.0 10.0 33.4 8.4 5.3
1996 59.0 32.0 8.0 23.1 2.1 5.2
1995 52.0 32.0 15.0 37.4 16.8 5.6
1994 62.3 25.8 11.8 1.3 05.1 3.9
1993 57.8 29.7 12.5 10.0 11.2 2.9
Averages 60.9 28.4 9.6 14.9 6.9 4.6
Source: Rex Thompson, Southern Methodist University
This is not the way it is supposed to be. Experts are supposed to know.

Professor Thompson is quick to point out that this exercise isn't definitive proof that strategic asset allocation doesn't work or that Wall Street experts are always wrong.

He does, however, have some advice.

We should spend less time worrying about today's interpretation of the economic climate. "A long run risk/return approach is far better---one where you look over a 40-year period. A 60/40 split of stocks to bonds does a pretty good job of offsetting the risks we face"