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Your Money > Mortgages Articles > The Dark Art...
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By Harvey Jones
The Council of Mortgage Lenders has delivered a refreshingly honest reaction to the credit crunch, announcing that it won't offer any more house price predictions because it is "futile" in the current market. I wonder whether it will set a trend. Making financial predictions is tempting, because people will always want to hear them, no matter how wrong they (invariably) turn out to be. The financial services industry is bursting with soothsayers and fortune tellers, all peering into their crystal balls to tell us what lies in store for interest rates, stock markets, bond yields, insurance premiums, annuity rates, utility bills and of course house prices. Prophet warning I admire their pluck. More than that, I admire the unembarrassed way in which they revise their predictions, with barely a blush, after some new piece of data or unforeseen event turns their forecast on its head. Mortgage brokers who one month tell us that falling swap rates make now a good time to take out a tracker, and the next that inflationary pressures are likely to force base rates up, so we should all fix instead. Or investment analysts who assure us the worst of the credit crisis is now over, then (10 seconds later) burst into tears and start wailing that there is no end in sight. No future I know why they make these predictions. People are interested. They want to know what is going to happen next. When making important financial decisions, you need to have some view of the future, because what happens tomorrow will determine the success of decisions made today. Ignoring the future isn't an option. So if you're desperately trying to keep a lid on your utility bills, it helps to have an expert tell you whether energy prices are likely to rise (in which case you might pay extra to cap your tariff), or fall (in which case you won't). And if you've got a little money to invest in stock markets, you'll want to know whether the global mining sector or South Korean smaller companies are likely to deliver the best returns. The problem is, nobody knows. I don't, you don't, the experts don't, and never more so than now, when we live in such astonishingly unpredictable times. The only difference is that the experts claim to know. If they're so clever, why didn't they warn us about Lehman Brothers, Bradford & Bingley, Washington Mutual? Chaos theory If the future is at best uncertain, and downright chaotic, how on earth can we financially plan for it? Actually, there is a way. We have to stop obsessing over short-term movements, and keep our eyes focused on long-term trends. That means don't try to spot the bottom of the stock market, as I've been trying (and failing) to do recently, because you will inevitably miss it. Instead, start feeding in regular monthly amounts to benefit from the current lows, and keep the money invested for the long-term. And don't worry too much about falling house prices (provided you can afford your mortgage and don't plan to move home for a while), just keep servicing your debt and hang on for better times. Perversely, the more distant the prediction, the easier it can be to get it right. I confidently predict the majority of us will live for a decade or more after we retire, and if we rely on the state to keep us fed and watered, we will be in for a thin time of it. So start saving all you can now not in Taiwanese semi-conductors or the Russian state energy sector, but in a balanced portfolio of shares, bonds, cash, and property. It's called asset allocation, and the reason that people don't talk about it more is that unlike the dark art of prophecy, it isn't very sexy. How predictable There will always be a market for people willing to predict the future, and we should treat their pronouncements with suspicion. We should remember that all too often the prophets themselves have a vested interest. The CML was more than happy to make predictions when house prices were soaring, it only discovered its limitations when they went into reverse. After all, which trade body wants to warn customers that its products are about to tumble in value? So perhaps the CML's discovery predictions are futile is less honest than I first thought. I confidently predict that as soon as prices start rising again, it will happily start second-guessing the market again. Prophecy is mostly harmless fun, just don't put your faith in it. Useful links:
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