Economic forecasting is an awful lot like weather forecasting. Based on what the experts know, we can be pretty certain of what’s going to happen in the next week or so. After that, we need to look at history and trends. Trying to make detailed predictions about what is going to happen in the future is a losing game, and yet the most common question I would get when I worked with investment accounts is “what’s the forecast?” “What are you guys seeing?” “What’s going to happen in the market?”
The fact is: no one knows. No one knows what the future holds. The smartest people in the investment biz can barely get it right half of the time. That’s why I almost always recommend using a cheap, well-diversified index fund instead of the latest convoluted idea being talked about. A lot of those latest-and-greatest strategies rely on what’s called backtesting to prove that they work. Well, of course they work in hindsight! It’s easy for me to tell you what weather already happened. That doesn’t mean it’s going to dictate what will happen going forward.
I think the reason why people feel the need to have an answer to the question “What’s the forecast?” is that it feels — for lack of a better word — stupid to not have some kind of opinion. I can only imagine the looks I would have gotten if I answered my clients’ questions with an “I don’t know” and a shrug.
Be prepared for any forecast
Have you ever noticed that neither economists nor weathermen publish their long-term accuracy? If you watch the financial news (I really prefer you don’t), they never say “our next guest is so-and-so! Their forecasts are correct 70% of the time!” Nope, it doesn’t happen. Because the forecast accuracy is dismal.
So what can you do? Like I’ve written before, you can’t outsmart the market. The best we can do is deal with it. Somedays we may have to grab an umbrella. More often, we’ll probably need sunscreen (I am obsessed with wearing sunscreen. My radiantly pasty skin demands it). Just like with weather, too, if you have big plans on a date where things have a good chance to get stormy, maybe it’s worth adjusting those plans. But it’s usually not necessary.
Investing should mostly be a rain-or-shine activity. You should be able to think of your portfolio like a shelter that you feel safe hunkering down in no matter what. For some people, that means they practically need a bunker. Others just want a decent screen porch to watch the world from. Most people will fall somewhere in between.
Wherever you are at, don’t ask me “what’s the forecast”. I’ll probably say “I don’t know” and shrug.
For all other questions personal finance related, don’t be afraid to ask.