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Balancing Predictions


Of all the predictions for 2013, the average prediction is an investors best bet.

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IN SUM

The average of ALL investment market predictions can result in the happy middle ground – a balanced portfolio.

DETAILS

Predictions for 2013

Investors might feel confused. On the same day that a headline announces economic growth is at stall speed, another headline suggests The big picture looks brighter for 2013.

Predictions for 2013 range from China shows signs of slowing growth to China side-steps a hard landing. Some say most of Europe will continue to be in recession while others say Europe is the cheapest it’s been in decades. And in the U.S., politicians may have avoided catastrophes, but their policies are still flawed. Mercer Investment Consulting says the tug-of-war between inflation and growth and deflation and recession will continue. The Economist.com adds to the uncertainty The world economy is improving. But not as much as some investors seem to think.

Convincing arguments can be made for both bullish and bearish scenarios. Some arguments are compelling. A few predictions might be somewhat correct. Many forecasts will be partially right and partially wrong. Some may be ½ right but wrong on timing. Some might get the direction correct but be off in magnitude. A couple will be just wrong.

This Way

How investors get some sense of direction from the divergent forecasts is beyond (my) comprehension. Should investors add to existing dividend holdings? Should they continue to plow money into emerging market stocks and bonds? In the hunt for yield, should they buy more REITs with the hope of an 8th consecutive year of positive performance? Depending on what or who is most believable, investors might be inclined to make investment bets. An alternative strategy would be to not make bets.

On Average …

One approach to investment portfolio management might be to assume that ALL predictions are flawed. ½ right. ½ wrong. At best. Assuming so, an investment portfolio wants to have the broadest exposures possible to participate in the partially correct forecasts while avoiding losing-it-all with the somewhat incorrect predictions.

Consensus Earnings Forecasts

… are a good example of a take the average principle in practice. If investors assume that the strategists make their bullish or bearish forecasts for forthcoming earning, then posture their portfolios as such, then by default funds will flow to those areas of the market that are either growth oriented or defensive. Collective buying and selling to re-position for bullish or bearish scenarios becomes self-fulfilling.

Rather than an all-in bet, investing based on the average of ALL the predictions and forecasts starts to look a lot like a balanced portfolio. Individual investors looking for a guide will find the average Pension Fund in Canada (PIAC) is as good a starting point as any.

Average Balanced Fund Performance

Balanced fund Returns to Dec 31, 2012

Average Balanced fund asset mix is 45% Canada bonds, 25% Canada stocks, 15% US stocks and 15% EAFE stocks. Balanced fund performance will be updated here shortly.

Click on table for large image.

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Few predictions are ever 100% right. There is risk with an all-in strategy. Spreading ones bets and being somewhat correct is better than being all wrong. That’s the beauty of a balanced fund.

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Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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