CapitalTime

Articles on investing and capital management, with a quantitative focus.

I don’t know what the market will do

2019-07-17

The core idea underlying my approach to investing is: I don’t know what the market will do. I don’t know how the economy will behave, if we’ll get runaway inflation, and if stocks will continue to do well.

After accepting that I can’t predict what will happen going forward, I designed my investment strategy to maximize returns under a variety of market scenarios. I ended up with my PRP asset allocation. A key feature of this approach is that it doesn’t assume, or require, strength in stocks.

Which asset class will produce the best returns over the next year? Next decade? I don’t know. It could be stocks, bonds, or gold.

My view was inspired by Harry Browne, who wrote the following in his book, Fail-Safe Investing:

The beginning of investment wisdom is to accept that we live in an uncertain world, and that we can never have enough information to know for certain why the market went up or down today — let alone what it’s going to do tomorrow. We know only a little about the present — and much less about the future.

No one can tell you when the stock market will peak, how far it will fall, or which market group will lead the way back up. Human beings aren’t able to foresee the future in any useful way. For every example cited of an investment forecast that came true, I can point to five that didn’t — some of which may have come from the same forecaster.

There’s a nice discussion of this in the Radical Personal Finance podcast at 13:52.

— Jem Berkes