Beware of Doomsday Predictions
By: Bryan J. Koslow, MBA, CFP®, CPA, PFS, CDFA™
About once per month, I receive a call from a client with a question about some doomsday prediction that he or she recently heard or read. The client usually can’t remember who said or wrote the prediction but is clearly nervous. He or she wants to know if I think the dollar is going to be worthless, or if the stock market is going to crash, or if he or she should be buying gold bricks.
Bold predictions are great for marketing purposes and often lead to increased sales (in the short term) of whatever product the “expert” is representing. It’s incredible how many “experts” are wrong so often. Remember Meredith Whitney? She shot to fame after correctly forecasting the issues among some of the large financial institutions during the 2007–2008 crisis. Since then, she boldly (and incorrectly so far) predicted hundreds of billions of dollars in municipal bond defaults, started her own advisory firm, and started and blew up a hedge fund. Clearly, the notoriety that she gained from bold predictions helped her attract clients for her new ventures. The same goes for people peddling investment newsletters, mutual funds, separately managed accounts, and ETFs.
I always start my response by reminding clients that nobody has a crystal ball but that we can make educated guesses (and investments) based on current economic conditions and future expectations. Then I usually ask a question pertaining to the asset class we’re discussing. For example, if the client is worried that the stock market is going to decline by 50 percent, I will ask something like “If everyone sells their stocks, where will the money go?” In today’s market environment, cash offers little to no yield, and historically safe havens such as U.S. Treasurys provide low yields and significant interest rate risk. Gold has been a big underperformer for years, and real estate bears liquidity issues and interest risk.
This conversation gives the client a view into the world of intermarket relationships—how movements in asset classes affect one another—and reminds them of the importance of diversification. As an individual investor, you have the freedom and flexibility to choose which parts of the market you want exposure to. You don’t necessarily need to beat a benchmark. Instead, your portfolio should be structured in a way that is consistent with your investment objectives, risk tolerance, and time horizon. In other words, your portfolio should reflect your financial plan.
As Warren Buffett famously said in 1974: “I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”