Last year's forecasts were mostly wrong

January 12, 1992|By James J. Mitchell | James J. Mitchell,Knight-Ridder News Service NbB

Would you be inclined to invest in mutual funds with a company whose chief economist a year ago said we wouldn't have a severe recession or whose bond expert predicted then that interest rates would rise in the second half of 1991?

Or would you prefer to put your money in mutual funds managed by a company that had a strong 1991, with many of its funds doing better than the Dow Jones industrial average?

The company in both examples is Baltimore's T. Rowe Price. Many of its funds posted excellent results for 1992. For example, its growth and income fund was up 31.5 percent, compared with a 24.2 percent increase in the Dow. Yet many of Price's economic predictions of a year ago were well off the mark.

In fact, most economic forecasts made a year ago were wrong -- as is the case every year because so many economic variables change unpredictably.

Despite the dismal track record of economic forecasters, many bankers, mutual fund executives and stockbrokers, as well as economists, flood the media and the mail at this time of year with predictions about where the economy is headed. And many investors pay attention to all of them in the hopes they'll find a shortcut to making money.

That's a big mistake, says John H. Cammack, vice president of T. Rowe Price. Instead, he recommends that investors determine their investment style and then search for information that is most pertinent to that style.

L Mr. Cammack says there are four principal investment styles:

* A top-down approach, where you look at economic trends and NTC try to position your money to take advantage of future events. This type of investor would try to determine which way interest rates are heading or what will happen to the dollar.

* A fundamental approach, which consists of looking at each stock separately and analyzing such areas as quality of management, position in its industry and earnings potential.

* Sector rotation, under which you favor different areas of the stock or bond market depending on which sectors you believe are over- or undervalued.

* Strategic asset allocation, which involves looking back, determining how different asset categories have performed historically and, based on your investment objectives, creating a diversified portfolio with the greatest potential for return compatible with a level of risk you're comfortable with.

Choosing and sticking with one of these styles prevents investors "from being overwhelmed with data," Mr. Cammack says. For most investors, being disciplined is more important than having great information, because "emotions are what get in the way of making good decisions," Mr. Cammack says.

And how did the Price funds do well despite its executives' poor economic predictions? "It's up to each portfolio manager to determine in his or her own analysis how relevant economic forecasts are -- our own or services we subscribe to," Mr. Cammack says tactfully.

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