Can Financial Forecasting Predict the Best Investments?

Interview With Roger Whitney

Douglas Goldstein and Roger Whitney talk about markets and predictions. Too many investors expect their money managers to predict the market’s future. Instead, what should these investors realize?

Douglas Goldstein: I’m very excited to bring back to The Goldstein on Gelt Show my very good friend, Roger Whitney, who you have probably heard on the show before. Roger and I also did a very popular webinar right after the election, when President Trump was elected. We were talking about what to expect when a new president gets elected to the White House. Roger, what I’m trying to figure out is, when you and I were talking about doing that webinar, we were trying to predict who was going to be the president. Of course, everyone was trying to predict the same. But when people try to forecast the markets, or presidents, or something, inevitably a lot of them end up being wrong.

Do you think people should invest, based on how they feel the market is going to move, or should they just leave it up to some kind of asset allocation model?

Roger Whitney: Today, people feel that something could happen in the market. A lot of people felt the same way right before the election: “Man, if that Trump guy wins, we are doomed.” I sat in on presentations by well-respected research analysts, with huge smart teams behind them that said, “If Trump wins, the market, right away, will shoot down 10%.” The problem with basing your investment strategy on predictions is that you have to have all those things right.

Douglas Goldstein: Roger, you’re talking about the importance of realizing that people make mistakes with forecasting. On the other hand, they work with money managers, financial managers, hedge fund managers, and investment advisors. It seems to me that clients often come to us and say, “Doug, I know that you’re not a prophet, but what should I do with my money? How should I invest given what’s going on in the world today?” What do you tell them?

Everything Is Unknowable … Including the Markets

Roger Whitney: What I talk about is having a solid process for how you can make the decision to allocate money that’s not predicated on predicting the future. You start off with helping them realize that everything is unknowable. We’ve got to make some smart assumptions about the future, but we don’t want to spend too much time trying to predict it. We want to spend a lot more time looking at all the evidence on what asset classes can do so that we can allocate prudently.

Douglas Goldstein: You need to realize that if you think the markets are high now, so that you sell out, you’re going to have to know when to buy back in, and then you’re going to have to know when to sell again and when to buy again. Compare that to people who follow the buy and hold approach. In order to do that, you have to be willing to actually hold on when the market drops and not try to guess, “Are we at the bottom yet? Is it time to sell or time to buy?”

Often times, we talk to clients about being long-term investors, which in theory is a very good idea. However, they don’t know what’s going to happen tomorrow. They are actually looking at the world very short-term and as advisors we are always telling them to look long-term. Have you found any good ways of telling people how to look long-term, and not worry about logging in every minute to see how their account is doing?

Helping People to Become Long-Term Investors

Roger Whitney: You have to do a little bit of both. You have to come to some framework for how you’re going to make that allocation decision. I keep coming back to that. I’ll give you an example. In my practice, I believe in the science of asset allocation and I use it, but I also believe that you can’t boil investing down to a science. You do have to have an art because assets get overpriced and underpriced in different areas of the world.

On the active side, the question is how much rope do you want to give yourself, to act on the assumption that X asset class is undervalued and that Y is overvalued? If you’re going to do that, who are you going to hire to do it? How high of a bar are you going to place to evaluate them to say, “Yes, they have some unique view and they are doing it in a reasonable way?” I think most people don’t put a high enough bar on any kind of manager that they hire. Some of the things that you and I have to do is help them have a framework so they don’t go totally art. If they do that, it will be that new modern stuff that nobody understands. We don’t want to go too science because it’s going to be that thing that is super boring.

There needs to be a balance. People don’t have a prudent framework for working through those decisions; even advisors in my opinion. I think a lot of people do it by intuition, based on how optimistic or pessimistic they feel.

Douglas Goldstein: We always tell people, “Past performance is no guarantee of future returns.” I often ask people, “Do you know why we tell you that?” I get a blank stare. I say, “Because it’s true. What happened yesterday is not necessarily an indication of what’s going to happen tomorrow.”

You said, a couple of minutes ago, that there are times when asset classes are overvalued or undervalued. You also said that people need to find the right advisor or the right manager to help them deal with that, as opposed to saying, “They have to recognize that themselves and make a move.” Do you think there is a time when clients need to do that or is it something that can all be outsourced to an advisor?

Do You Need An Investment Manager Or Can You Do It On Your Own?

Roger Whitney: I think that an individual can do it on their own, but they will need to be prudent in the way that they do it. If you’re going to use an advisor, you need to use an advisor that is more evolved than listening to their research departments and just working off of intuition. That’s a harder task to find, someone that actually has a process that they do things. I think you could do it on your own and I think you could do it with an advisor, but you can find an advisor that’s a lot worse than a client just because they don’t have a process. A lot of times as an advisor, you want to do well for your clients. You’re a pleaser. Sometimes you do things thinking you’re going to please the clients by being right, but what you’re doing instead is putting them at risk. The cost of being wrong can actually hold them back rather than spring them forward.

There Is No Quick Route To Riches

Douglas Goldstein: I’ve been doing this gig for 25 years now and what you’ve said is certainly true. When I was younger, I tried to do everything for everyone because I wanted to help. I still want to help today, but I feel that the wisdom of the ages has helped me to realize that there are not a million different ideas out there that everyone can try. Every time someone shows up with some new money-making idea, I don’t have to investigate or invest in every single one out there, because I’ve seen enough of them to realize there is no quick route to riches.

I prefer the slow but steady approach. I try to design logical portfolios. I always tell people that I can’t tell whether the portfolios I’m designing for them are the right ones. I can only tell you next year what I should have done today, but I can tell you that they will be reasonable. It is a reasonable portfolio given who the client is, given his tolerance for risk, and his timeframe. That’s the best that anyone can do. When people try to push you to do something one way or the other and sell their product because they happen to have some prophecy, I think that’s a red flag. Run away.

We are almost out of time, Roger. Tell me, how can people follow you if they just can’t stand a moment without you? What’s the best way to track you down?

Roger Whitney: The easiest way is listening to The Retirement Answer Man Podcast, where I talk about this stuff and talk about how to manage life and make decisions as you’re becoming more independent. You can find that on your local iTunes.

Douglas Goldstein: Thanks for your time, Roger.