In my last blog, I explained how I deal with uncertainty by always being ready for anything. I argued that proper portfolio construction, aligned with the client’s unique needs, should leave them in a strong long-term position regardless of what is going on in the economy and in capital markets.
Still, people often ask me what my outlook is and how I feel markets will perform over the next few months. It won’t surprise you that I try not to make those kinds of predictions and that I focus on the long term. But it is nearly impossible to work in this field and not have an opinion about where things are headed. So how do I formulate that view?
I am exposed to an enormous amount of information from a broad range of sources. I subscribe to a variety of publications and watch/listen to the financial media on tv/radio/internet. I also receive analysis from many of the world’s largest institutional money managers.
On any given day, I could hear a range of opinions. There are always a very small number of market watchers who have what most would consider to be extreme views. These are people who are either exceptionally pessimistic or optimistic about the future. For some, the sky is falling, and things are getting terrifyingly bad. For others, the sky is blue, and we’re looking at the opportunity of a lifetime.
But the vast majority of opinions are clustered around a more moderate view. Each is unique in some way and can be distinguished from the others. But they are all some version of this …. “things will be challenging for the next little while, but they will get back to normal in the not-too-distant future.” For example, some would say the economy will slow down but not go into a recession. Some would say we’ll have a recession later this year, but not a long or severe one. Still, others might say that we will have a sharp but short recession toward the middle of next year. Regardless of who is right, the recommended course of action is the same. Stay invested. Be properly diversified. Rebalance if necessary. Focus on the long term.
After listening to all of this, my personal outlook forms around what I call the “Middleview.” It’s not the consensus because there really isn’t one. It’s the midpoint of the range of moderate opinions. It doesn’t mean it will accurately predict what will occur. But it is a reasonable and prudent scenario on which to base your decisions. And, it will probably be very close.
I have heard of experiments carried out many times and originating at carnivals in the early part of the last century. They’d ask people to guess something, such as how many smarties were in a huge jar. Some people would make ridiculous guesses like 25 or 1,000,000. But most of the guesses would be in a more reasonable range. What researchers have found is that the average of all guesses was usually very close to the actual number.
Accurately predicting something as complex as the performance of global markets is as difficult as accurately guessing how many Smarties are in a big jar. But the right answer is usually somewhere in the middle of all forecasts. I stay away from making predictions not only because it is difficult but also because it usually won’t matter. I structure portfolios for the highest probability of success over the long term so that clients reach their goals regardless of whose forecast is closest to the mark; or, metaphorically speaking, regardless of how many Smarties are actually in the jar.