When half-right market forecasts are disastrous
In many other endeavors outside of investing, getting a forecast half-right isn't quite the end of the world. In asset allocation, however, half-right can be a killer.
In many other endeavors outside of investing, getting a forecast half-right isn't quite the end of the world. In asset allocation, however, half-right can be a killer.
PIMCO got it half-right with its New Normal forecast early in the post-crisis period - they nailed the economic environment we'd be in but completely missed one of the top ten stock market rallies of all time.
Barry Ritholtz has been writing about the Follies of Forecasting since before I was born, see this landmark 2005 piece on the subject at TheStreet.com. By the way, Barry's chutzpah to publish something like that in the pre-blog era - on a site rife with daily predictions - was quite extraordinary at the time.
In many other endeavors outside of investing, getting a forecast half-right isn't quite the end of the world (cloudy with a chance of showers doesn't upset anyone if the clouds arrive without any rain). In asset allocation, however, half-right can be a killer.
Here's John Rekenthaler at Morningstar:
Which was more important to have gotten right? Only an economic theorist or policymaker would say the former, for everyone else with real-world needs and concerns, the miss on the second part of the forecast has been annoying to disastrous, depending on how seriously it was taken by investors.
For those who took it to extremes, the opportunity cost has been tremendous and emotionally exhausting, not to mention all of the over-excited buying and selling and taxation and brokerage commissions larded on in the name of "managing risk".