Welcome to this, our first of three ‘Black Hole’ short stories. “The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith, Harvard Economist.
There are three Black Holes we need to avoid being sucked into as investors. These are economic forecasting, market timing and performance chasing.
These Black Holes form no place in a successful investment experience and so neither in our value proposition – nor even our conversation – because this is not something which we nor anyone else can consistently deliver.
Today we’ll look at Forecasting the Economy. We’ll cover the others in future articles.
The economy does not operate on the same cycle as the ‘markets’ except over the very longest time horizons. The economy is uncorrelated to markets. What implications does this have for us as investors?
It means that if we knew what the economy was going to do next – and we cannot – we would still not know what the markets would do.
Cast your mind back to the bottom of the Credit Crunch period in the ballpark of about nine or ten years ago. If you had been asked how the economy would perform over the following, say, four years – and by some supernatural revelation you actually knew the answer – you might have said, “For the entire four year period, we’ll have a very slow economic recovery; GDP growth would be very low and unemployment would remain very high”.
Let’s further say you insisted on inferring from those economic truths a market viewpoint, you would have probably sat in cash while the market returned about 140%.
There’s an old saying which bears careful meditation: never ask the economy what the markets are going to do. It won’t even tell you what it’s going to do.
So, what can you do?
Don’t be a prognosticator, be an investor. Don’t focus on economic forecasting, market timing and performance chasing; focus on your goals, plan and portfolio as the means of funding your plan.
As the first step to goal focus, why not try out the F.I.T. for Purpose questionnaire today?
“Modern finance is based primarily on scientific reasoning guided by theory, not subjectivity and speculation.” ― John “Mac” McQuown, Co-Founder Dimensional Fund Advisors
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Investors should remember that the value of investments, and the income from them, can go down as well as up. This update has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for everyone.