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Solid advice: Treat the future with deference
5/26/2019 1:52:23 AM
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By Fund Library News Wire  | Thursday, May 31, 2018


By James Norton, Senior Investment Planner, Vanguard U.K.

If you’re a regular visitor to our site, you’ll have come across the name of my colleague Joe Davis, who serves as Vanguard’s global chief economist. He’s got a mind for figures and economic theory like few others I’ve encountered. Joe is fond of saying we should “treat the future with the deference it deserves.” I happen to think that’s excellent advice. Let me explain.

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 forecasters.

Consider this chart, which shows our outlook for economic growth in Canada for 2018:

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 below.

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 turbulent.

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 part by any means without prior written permission is prohibited. This article first appeared on the “Insights” page of the Vanguard Group, Inc.’s website. Used with permission.

Important information

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 his views and opinions whether as a result of new information, changing circumstances, future events or otherwise.

While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation.

Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

All investments are subject to risk, including the possible loss of principal.

This material does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

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