Forecasting the financial markets is often a mug’s game

The Black Swan is back and I’m not talking about something that paddles around the Lough in Cork City, particularly at this time of year.

Instead, there are a number of huge unpredicted events taking place in financial markets that once again remind us of about flawed human arrogance that we can predict the future.

Last week it was the Swiss National Bank, that country’s Central Bank, which dropped a bombshell. It decided to stop a system that was used to peg the Swiss franc to the euro for the past four years.

Within minutes the franc rose dramatically against all currencies and at one point was up over 30% against the euro.

That is a remarkable move for a mainstream currency which is used to moving by very small percentages on a daily basis.

Within hours the sharp movement in the Swiss currency caused financial aftershocks for institutions worldwide with foreign exchange brokers from the US to New Zealand warning that their regulatory capital requirements were under severe pressure.

Swiss mortgages, which became fashionable around Europe due to their low interest rates, suddenly turned ugly as home owners, especially in Central European economies including Poland, faced a near 30% hike in the capital value of their loans.

Another dark creature of the winged variety has been the price of oil. It has fallen close to 50% in less than a year and caused seismic shocks across the financial world, not least in the land of Experts.

“Experts” are a breed that exist in the media world as individuals who supposedly know their chosen area of speciality. Usually well groomed, and media friendly, they opine with gravitas about the future direction of many financial assets.

Oil, for years, was a no brainer among the “experts” as they repeatedly predicted the inexorable rise of oil prices.

Amid the expert community there existed a tribe we could call the End-Of-Worlders. These EOWs told us a simple parable. Wretched humanity was consuming the world’s resources at such a pace that prices would keep shooting up endlessly and oil was a classic example.

Team EOW have been remarkably quiet in recent months. The discovery of shale oil and the human ability to innovate around energy consumption were factors missed by the EOW. As importantly, they forgot that Saudi Arabia can still pull oil out of the ground at about $10 a barrel.

A key message from both the Swiss franc and oil experiences is that forecasting the price of assets and economies is often a mug’s game. Entire industries have built up around the notion that we humans are genius enough to predict the future. That industry stands beside the everyday experience of you and I that knowing what will happen tomorrow is a major challenge.

While it all looks very pretty to present the future of well laid out tables and charts the actual world operates differently.

All of this should influence the way you use money to create wealth. There are no sure-fire things in financial markets so having a balanced and conservative approach to creating a nest egg is essential.

Having too many chips dedicated to one asset class is Lesson No 1. Those who have over indexed investment in oil or commodities in the last two years are sorry souls at present. Those who piled in to Irish property in the mid-noughties are another sore group.

Lesson No 2 is to have realistic expectations.

In a world where interest rates are close to zero and inflation is hovering under 2% any financial assets that promise huge premiums to those returns should be viewed with a health warning.

Having a collection of investments that get you a low risk return of 5% in 2015 would be a fine achievement, unless of course you want to own Outer Mongolian bonds. I hear some experts think they are a no brainer.

Joe Gill is director of Corporate Broking with Goodbody Stockbrokers. His views are personal.

Joe Gill