Forecasting Fairytales

Short, Mid And Long Term.

After another conversation, I am back at the keyboard to address another frequently asked question that deserves a bit more explanation. This one is a big one. For some reason, this seems to be a favorite question from individuals when they start to talk finance. Once again, the industry has conditioned us well and this question comes in all shapes and sizes. It’s the forecasting question:

What do you think the markets will do over the next _______?

We can finish the question in all sorts of ways. For instance… over the short term, over the next 6 months, 1 year, 3 years, 5 years, or even the next DECADE? Most of the time it comes from everyday individuals who don’t really follow markets but know they need them to help reach their long-term goals, and they are very sincere and often concerned when asking.

On TV, financial pundits seem to love this question as they get to pontificate on how smart they are and why they have the right path, only to be forgotten in a month when they tell a different story on a different network so 3 years from now they can pull back out the one that was correct and forget the other one was ever said. It makes for great marketing, which is what most financial TV is really designed for.  

Advisors do it for quite different reasons. They do not really like to put their neck on the line for those kinds of projections, but the long-term market statistics give them numbers to lean on and help calm the client by focusing on the long-term, especially when we are in the midst of a bout of short-term turmoil.

The long-term argument has been a great calming support and a crutch to take the focus off the here and now. This has been a great strategy for the industry and in many cases, it works in the short-term and is likely forgotten over the long-term, when things improve.

For over two decades now, my answer has remained the same. I am happy to tell you where we are now and give some scenarios and themes I believe will be with us for the long-term, but any projections I might offer never, ever, EVER go out further than six months.

The main reason I say this is that in today’s world with as many variables, both positive and negative, coming at us from every angle and faster than ever before, I just cannot see how anyone can project or forecast out longer than that with any degree of certainty. It seems like an exercise in futility where I am not really adding any value to anyone’s situation but instead appeasing their desire for a quick easy answer to a million-variable question. It can’t be done with any accuracy and really doesn’t help navigate the current environment either as it defers the issues to some later date down the road, even if they should be dealt with now. Projections are as standard as sliced bread in the industry, so when I give my reasoning to the questioner for not giving one, it starts to sink in and I can see the wheels turning as they think back on past projections they have been told.  

The key to my confidence in this explanation is knowing I do not have to try and guess that far out. Why? Activity and Focus – not necessarily in that order. 

We focus on the market environment and relative performance Every. Single. Day. Not monthly or quarterly just to review like a lot of advisors. We keep a strong situational awareness of where the markets are today and construction scenarios on where we believe they are headed. Often those scenarios and themes can last years and even decades in some cases; but we also realize and admit, they all don’t work out and many that do, don’t need decades to play out. 

While no one gets all the twists and turns of the markets, when you know where the money is flowing within the markets, it is easier to be more active with confidence in the opportunities that are presenting themselves right now.  Being willing to use the knowledge we have and being active in seizing opportunities when they present themselves and being willing to eliminate the ones that aren’t working, not only increases potential performance but can also substantially reduce risk by avoiding areas that look problematic. 

It is a simple concept, but not easy if we are focused out too far and often on the wrong things. We focus on markets and managing our portfolios with the best tools, insight, and flexibility possible, thus giving us the ability to say that we don’t really know where the markets will be in X years. But we are confident that wherever they are, we can find the opportunities needed to excel no matter the environment. 

So, it doesn’t matter to us if it is 6 months, 3 years, or a decade, our process stays the same every day:

  1. Identifying where we have been,
  2. Where we are now,
  3. And where the money is flowing, which can often hint at where we are going next.

But for how long? That is a question too difficult for anyone to answer. 

So next time questions of market and time come to mind or someone starts long-term forecasting, think of 6 months as the furthest horizon, not 5-10 years – that’s a fairytale.


If you missed what started this whole conversation, check out the first in this series: Are Aggressive and Active the Same?