No crystal ball
The urge to make predictions – about the weather, a hockey game, an
election result or the rising and falling of the stock market – is
practically universal. It’s how we respond to those predictions,
particularly the financial ones, that can get us into trouble.
There’s no shortage of would-be investment experts claiming to know what’s
going to happen next in the markets. Some purport to have discovered the
next Google. Others insist that it’s time to buy gold or real estate. Still
others want you to shift your money from X to Y because they’ve found a
once-in-a-lifetime opportunity to get rich.
The thing is, they’re very often wrong. The future guards its secrets
carefully, and it must be treated with...well, deference. There is no
crystal ball for investors. (And if there were, would anyone even be
willing to share it?)
A range of possibilities
Early this year, Joe Davis and his team released Vanguard’s forecast for
economic and market conditions titled “Rising risks to the status quo.” Among its prognoses:
* Investors can expect a period of “higher risks and lower returns.”
* The economic climate in Canada will remain fairly healthy, but growth
will be below consensus expectations in 2018.
* Global equity market returns will be in the 4%-6% range annually, on
average, for the next several years, with Canadian equities on the lower
end of that range.
Woven through Vanguard’s report is an important cautionary message: We could be wrong. That’s why any forecast we issue is built
around a broad range of possible outcomes rather than one definitive
prediction. It’s our way of acknowledging that the future is unforeseeable.
And it’s a reminder that basing your important financial decisions on
someone else’s prognostications can be foolish.
By assessing a range of possibilities, Vanguard’s economists can be more
circumspect in their forecasts. They feel confident enough to say that one
particular scenario (sometimes referred to as the central tendency
) exhibits a higher likelihood, but they also acknowledge that other
results are possible, albeit less so. This approach, forecasting ranges
rather than single-point estimates, sets Vanguard apart from most other
Consider this chart, which shows our outlook for economic growth in Canada
The most likely result in our view (our central tendency) is in the middle,
with the least likely scenarios at either end. As you can see, we estimate
a 40% probability – the yellow bar – that Canadian GDP will grow at a rate
of 1.5% to 3.5% in 2018. There’s a 20% chance of growth picking up and a
40% chance of a slowdown or recession.
Yes, you could interpret this chart as “predicting” growth of around 2% in
2018. But it also allows for other outcomes. Indeed, we see a 60% chance of
growth falling somewhere outside our central tendency, either above it or
Whether you’re forecasting global economic performance or creating a
personal investment strategy for your retirement, it’s important to
consider many different possibilities. Much is at stake, after all, and the
future is full of surprises.
What should you do?
So if you’re not supposed to make investment decisions based on some
pundit’s confident predictions, what can you do? Well, Vanguard’s answer is
on the first page of “Rising risks to the status quo”:
“Our market outlook underscores the need for investors to remain
disciplined and globally diversified, armed with realistic return
expectations and low-cost strategies.”
In other words, make sure you and your portfolio are ready for a variety of
scenarios. Create a sound long-term plan, diversify your holdings, pay
close attention to investment costs, and keep calm when the markets become
Put another way: Treat the future with the deference it deserves.
James Norton is Senior Investment Planner for Vanguard UK.
Notes and Disclaimer
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
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article first appeared on the “Insights” page of the Vanguard Group, Inc.’s website. Used with permission.
The views expressed in this material are based on the author's assessment
as of the first publication date (April 2018), are subject to change
without notice and may not represent the views and/or opinions of Vanguard
Investments Canada Inc. The author may not necessarily update or supplement
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