How to Handle Market Forecasts

Market forecasts are a favorite plaything of the financial media.  As investors we can’t avoid having some opinion on how stocks, bonds, commodities and such are going to perform in the future, and so it’s only natural we take great interest in forecasts.  Even if we insist that we’re not taking a position and relying only on historical performance, we’re only using past performance as a surrogate for future performance.  There would be no point in owning any asset if we didn’t think some aspect of its likely future performance would be of use to us.  Yet unless we take a vow of poverty and join the brotherhood, we have no choice but to own assets, even if the asset is ordinary cash.  

So one way or another, explicitly or implicitly, you’re either broke or relying on some kind of forecast.  The only questions are which ones you choose and how confident you are in them.  

So what do you do with a forecast?  Suppose you read somewhere that interest rates will rise and bond prices will fall.  Or that stocks will be up 20% over the next year.  And that the forcecaster has good reasons to support his view and that you want to act on it.  Regardless, my view is that you should ask yourself both what if the forecast turns out to be correct and what if it doesn’t.  How will you be affected and how will you react?  The greatest value of forecasts to you is to challenge you to visualize scenarios.  Rather than assume the forecast is correct and arrange your portfolio to get the most profit, ask yourself what effect it would have if it were correct … would your portfolio be devastated?

By far the most important forecast to be mindful of is the long term forecast, usually the one that most closely corresponds to your investment time frame.  This is the one you’re using to set your asset allocation targets.  Look at a range of forecasts.  Does your allocation hold up under all of the most reasonable of them?  If you’re appropriately diversified, it should.

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