As I write this, the U.S. markets have been bumping against all-time highs as if they are some sort of ceiling, the emerging markets (and their stocks) are really struggling, oil and gas are cheap, China's economy is facing a lot of hurdles and, well, this is exactly the opposite of a lot of what Mohammed El-Erian was predicting in his very well-written and thoughtful book "The New Normal."
And, of course, El Erian was not alone. In the wake of 2008, it seemed like the world's future growth would come from the countries that had the farthest to grow, and the economic model that we were familiar with would labor mightily against the forces of demographics, diminishing energy supplies and a certain ossification in the way developed nations do things. The predictions were highly-plausible–and dead wrong.
I found myself wondering about El-Erian's return to Pimco, whether he was hired, in part, to predict the future in a very public way and gain a lot of media attention that would position his firm as a thought leader (which he did very successfully). And then I wondered about his exit interview, where somebody might have said, well, Mohammed, some of those predictions didn't actually come true, and that's kind of a problem for us. You know, when we said you should predict the future, we wanted you to do it ACCURATELY…
The point? There is a built-in danger in tying your value and reputation to your ability to forecast what is going to happen next in our unpredictable world, and I think El Erian was a well-meaning, highly-thoughtful example of it. Bigger picture, I think there is a danger to all of us in listening to the "experts" when they cross that invisible line and stray from what they know into what they expect.
This is a double-edged danger for advisors. First, you are exposed to a lot of thoughtful portfolio managers, commentators, analysts and deep thinkers, who are all really smart and thoughtful in their fields. They are worth listening to in their areas of expertise, but perhaps not so much when they start projecting what they know into something that sounds like what will be. You have to be wary about following them across that line. And, of course, there are others who brazenly predict reasonable-sounding futures, with very compelling charts and graphs and chains of logic, mostly to get attention and promote themselves. History has not been kind to them or the people who took their advice. I'm talking about just about everybody who has ever predicted the collapse of civilization or a major economic catastrophe, along with a variety of market timers and quixotic asset managers who invest as if the future is knowable, like Harry Dent.
The other danger is thinking that you know where things are going yourself. Here I'm talking about the near-certainty among advisors, going back five years and counting, that interest rates were going to spike and wipe out bond portfolios. Or the fear after the 2008 meltdown that led so many advisors to put off rebalancing client portfolios at the most opportune prices in a generation–because, well, they, like the rest of us, were expecting the carnage to continue. When we look back, we see the past littered with opportunity costs triggered by our belief that we knew what was coming when we didn't.
What am I proposing here? I think professionals need to take a pledge that we won't put too much stock in forecasts or predictions–or make them ourselves. We need to institutionalize the idea that the future is always going to surprise us, and that no expert in any field has expertise in crystal ball reading. We need to be constantly aware of the assumptions we are making about the future of the markets and the world economy, and recognize that they may be wrong, and protect clients from the consequences of our inevitable wrongness.
This, I think, is extremely hard work. There is a tendency built into the synaptic structure of our brains to anticipate, project and predict, and our antennae are highly-sensitive to predictions made by respected commentators. Filtering out this misleading "data" is not going to be easy, even though hindsight provides countless examples of the wisdom of this effort. But I think, over time, turning a deaf ear to predictions may prove to be one of the most valuable services that you can offer your clients: the willingness to make decisions in the absence of any clues about what the markets are going to do next, preserving the ability to respond to whatever is happening in real time–or, in many cases, not respond.
That said, I'm going to make a prediction. I predict that many other Mohammed El-Erians are going to emerge from the investment world and deliver very thoughtful evaluations of what is coming, and I predict that they will be just as wrong in their actionable conclusions as he was. And I predict that you and I and everyone else will be drawn into their vision of the future.
What I can't predict is how well, the next time and the next and the one after that, we will hang onto our skepticism in the face of that plausible vision in the crystal ball. For the sake of your clients, I hope we all get better at it than we have been in the past.