What Should We Then Expect (From Investing)?

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Empty Quarter
Fun with Forecasting: Choosing Your Time Periods
Late in the Cycle
Removing Emotions
Can It Get Any Better Than This?
Puerto Rico, Dallas, Cleveland, Cleveland, Cleveland, and ???

“Plans are worthless, but planning is everything.”

—US President Dwight D. Eisenhower

There are many versions of that Eisenhower quote he learned in the Army. Nixon, who probably heard it from Eisenhower directly, modified it to “… plans are useless, but planning is indispensable.” Both are variations on the theme, “No battle plan survives first contact with the enemy.”

Today we’ll look at what we should expect from our investing. In case you haven’t noticed, financial markets are really a giant expectations game. A company can report great quarterly results and still get crushed if earnings are less than analysts expected.

I have talked about this before: All economic, budget, and investment models are based on assumptions. Those assumptions generally use past experience to project the future. I actually heard a well-respected Federal Reserve economist admit that forecasts using the Phillips curve are fraught with problems. When asked, “Then why do you keep using it?” the (paraphrased) answer was, “We need something to base our projections on. We don’t have any other better model, so we use it.” Knowing their method will deliver faulty results, they still use it anyway.

During World War II, Nobel laureate Ken Arrow was assigned to a team of statisticians to produce long-range weather forecasts. After a time, Arrow and his team determined that their forecasts were not much better than pulling predictions out of a hat. They wrote their superiors, asking to be relieved of the duty. They received the following reply, and I quote: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

With that acknowledgment, and since we are going to discuss potential future investment returns for your own planning purposes, it is important to recognize the choice of which data you use, which assumptions you make, and which models you select will have a big influence on your plans and thus your outcomes.

Let me make one obvious, at least to me, point. Many financial advisors, when developing retirement plans, use a simple long-term average of the stock market. They often assume a 7% or 8% growth in the equity portion of a portfolio both pre- and post-retirement.

I think the data shows that is an extremely unwise assumption. If your investment and retirement plans assume such results, I suggest you reconsider. Maybe find a financial planner or software program with a bit more sophistication.