The Industry’s Crystal Ball Racket

By James E. Wilson via

The NYT recently ran an article titled Recession Chances Rise: Time for a Gut Check by columnist Jeff Sommer. The online edition carried a somewhat different title “Vanguard Warns of Worsening Odds for the Economy & Markets 2020.” The article quotes Fran Kinnery from Vanguard saying “You want to be prepared for a downturn.”

So, what is the prescription from this piece? To run from the market in fear? Investment organizations, even those as reputable as Vanguard, can’t resist trying to predict the future. After all, that’s what investors want: to know what’s going to happen in advance. Forecasting the future is at the core of investment marketing by traditional brokerage firms. Investors want their advisors to have the proverbial crystal ball that can see into the future.

Market Fluctuations are Good

The more reliable path forward is to clearly understand and accept that no one has a crystal ball. Sure, the future may look a little different than the past. But markets have always moved both higher and lower and that won’t change.

Moreover, the moving lower part serves the purpose of shaking out the non-believers. The presence of market fluctuation is why well above-inflation investment returns have historically been available to investors.

Think about the economy and markets like a roller coaster. You know when you get on the ride that there will be some twists and turns along the way. But in the end, you will like the ride and want to do it again. Why then, is it newsworthy to write articles that essentially say, “the roller coaster has twists and turns”? Isn’t that just normal?

No Need for a Crystal Ball

Perhaps the most compelling aspect of Evidence Based Investing is that a crystal ball isn’t required. There’s no need. As Nick Murray says in his excellent book Around The Year, “permanent loss in a well diversified equity portfolio is always a human achievement, of which the market itself is incapable.” Indeed, capitulation is the long-term investors largest risk.

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