Predict the Markets

We’ve posted some of David Hultstrom’s thoughts before and here we go again since he says “Feel free to pass this along.” The following, from his November, describes why he doesn’t try to predict movement in the financial marketplace:

You may have noticed that I rarely comment on the market or economy in this monthly newsletter and this month I thought I would explain why and also explain what we do focus on.

There are three reasons why I don’t talk or write much about what the market or economy might do in the near future:

First, no one – including me – generally knows. (See The Signal and the Noise by Nate Silver, Expert Political Judgement by Phil Tetlock, and The Fortune Sellers by William Sherden for example.) Known information is already priced into the market. It is only profitable to invest based on things you know that everyone else doesn’t! That type of knowledge is generally either a delusion (we really don’t know) or insider trading (which is illegal).

Second, there is so much other commentary in the media on the state of markets and the economy that I doubt I could add much of value to the babble. Indeed, I think the best thing we all could probably do is stop listening to most of it.

Third, the important thing is whether you can reach your long-term financial goals such as a enjoying a comfortable retirement, providing a quality education for your progeny, or leaving a lasting legacy to your heirs or preferred charities. What is expected to happen to the unemployment rate or what might happen to the Dow Jones Industrial Average in the immediate future has very little to do with accomplishing those goals. If I spent more time prognosticating it might give the misleading impression that the short term market gyrations are important.

So what should the approach be? Instead of trying to predict the one future that may happen and position a portfolio to profit from it (a fool’s errand), it is better to try to determine what scenarios could plausibly happen and then make sure that the portfolio is positioned in such a way that regardless of the particular future that plays out your goals will still be attainable.

As I have said elsewhere: “Anyone can design a financial plan or portfolio that does well if the assumptions are correct. The trick is to design one that works pretty well even if you are completely wrong.”

In short, we are not trying to divine the future and plot the strategy that optimizes for that, but rather our goal is to implement portfolios that perform adequately in the long run regardless of what the future holds. Thus our clients are unlikely to wind up extremely rich or extremely poor because we won’t ever be “all in” on a bet that could go very right or very wrong.

You can learn more about Mr. Hultstrom at Financial Architects.