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Folly of Forecasting Redux or The Perils of Listening and Acting on Predictions

October 15, 2015

Forecasting the future path of the economy and markets is an endless obsession on Wall Street and in the financial press. This is no cottage industry but something that enormous amounts of money are spent on. CNBC is one part reporting what is happening and two parts asking people what they think is going to happen in the future. “I think” maybe the two words most used during each segment. Everyone tells you what they ”think” will happen. Ironically the evidence is clear that no one knows. No one.

There are many recent examples of the perils of predicting. How many analysts predicted US equities would increase 30+% in 2013? I bet the majority predicted the customary 10% plus or minus. Last April all 67 economists surveyed by Bloomberg predicted that interest rates would rise by the end of the year. Combined they were 0 for 67. The oil market is another terrific recent example of the folly of forecasting. With oil trading in the mid $90’s at midyear last year not one analyst called for the steep decline to $50 by the end of the year. The clincher was the economic and market turmoil that occurred in 2008. The major Wall Street strategists and more interestingly the 1000+ economists at the Federal Reserve Banks around the country missed seeing it coming – badly.

John Galbraith stated “Pundits forecast not because they know but because they were asked” or better yet Lao Tzu, 6th century poet said “Those who have knowledge don’t predict. Those who predict don’t have knowledge.” A columnist recommended the SEC mandate the following disclosure regarding forecasts “The undersigned states he has no idea what is going to happen, and hereby declares that his prediction is merely a widely unsupported speculation”. Relying on forecasts can be hazardous to one’s investment portfolio. Why do people listen? Human behavior. In the face of uncertainty people need financial astrology, something to cling despite the uselessness of many forecasts.

So what should one do? Recognize that there are many probable outcomes. Determine your risk tolerance and rather than relying on market fortune-telling build a portfolio strategy that invests in a wide range of asset classes, equity and fixed income; domestic and international; and real estate. Be prepared for many possible economic outcomes; growth, stagnation, inflation and deflation. Stress the factors that have proven to have higher expected returns over the long term – value, small size, low volatility, and momentum.

Versatile Capital Management recognizes that we are not fortune-tellers. We are in the business of using widely acknowledged academic research to help navigate what is an unpredictable future. Diversification1, controlling fees, rebalancing2 do not make for excitement but when it comes to successful investing too often boring is the best path to follow. Gordon Gekko said “greed is good”. Versatile counters with “boring and disciplined is better”. We help investors avoid the behavioral errors that plague individuals (and professionals). In the end the only goal that matters is reaching your financial goal.


  1. Diversification does not reduce the risk of market loss.
  2. Rebalancing can entail transaction costs and tax consequences that should be considered when determining rebalancing strategy.

Investment Advisory services are offered through Versatile Capital Management, LLC, a Registered Investment Advisor.
This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.


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