Three minutes before the start of a football game, the team captains meet at center field with a referee for a coin toss. The captain of the visiting team calls the toss. Winner of the toss gets to choose whether his team kicks off or receives to start the game. (There are other choices he can make, but we’re going to keep this analogy simple.) One thing is certain: the winner of the toss will not receive accolades for his skill at predicting future outcomes. Everybody knows that the outcome is random, and that his odds of being right are 50-50. If he calls it right five times in a row, we call him lucky, not good.
On May9-10, Bloomberg Global surveyed 1,263 of their subscribers to poll them about their take on the economic future. Poll respondents tend to be financially savvy people: economists, investment bankers, hedge fund managers, and generally sophisticated investors. When asked if the S&P 500 Index would be higher six months in the future, 48% said yes. But 50% said no. And 2% were honest enough to admit they had no idea. So disregarding the honest 2%, half answered the question yes, and half answered no. I can say without any doubt that half of them are right. But then you’ll probably go and spoil things by asking which half.
This sort of 50/50 breakdown is not uncommon. Back in January, a Bloomberg poll found half of respondents declaring that a state or major U.S. city would default on its municipal bonds this year. But 46% — nearly half — thought that prospect unlikely. You can bet that the half that turns out to have gotten it right will say they were good, not merely lucky. The truth is there are way too may variables, both seen and unseen, that impact the outcome for anyone to “know” what’s really going to happen. But that won’t keep half of them from claiming they did.
This would be of little consequence if it were not for the fact that so many people make investment decisions based on the predictions of People Who Claim to Know. They buy gold at $1500 per ounce because their favorite guru claims it’s going to run up to $2500 per ounce this year. They move into (or out of) stocks. Or Treasuries. Or emerging market debt. Or commodities. All because of what somebody or other says is going to happen next.
Like a coin toss, all economic predictions have only two possible outcomes. They will prove to be correct, or they will not. But do you really want to risk any part of your hard-earned nest egg on something like a coin toss? I know I don’t.
Here’s a better idea: Acknowledge that the future is both unknown and unknowable. Instead of looking for a guru to follow with a great record in the coin toss, consider trying to build an “all-weather portfolio” that will allow you to make progress toward your financial goals under a wide variety of possible conditions. You want investments that will benefit if the dollar weakens, as well as investments that will benefit if it strengthens. You want to be prepared for inflation and deflation, expansion and recession. Rather than having to know what’s next, you can know that you are prepared for a variety of possibilities. I go into this whole concept in much greater detail in Chapter 11 of Making Mammon Serve You. It’s recommended reading, if I do say so myself.
Building an all-weather portfolio is not a piece of cake, and it’s not an exact science. But it sure beats betting the ranch on a coin toss.