Prediction vs. Preparation

We’re coming up on that time of year when professional pundits and investors alike trot out their annual forecasts for the upcoming year.

I have nothing against forecasts. It can be a fun exercise and if we want to get into semantics, we’re all forecasting in one way or another based on how our portfolios are positioned.

But I’ve always found it’s more useful as an investor to prepare than to predict.

Prediction is about trying to be right while preparation is about setting the right expectations. And investing has a lot more to do with setting reasonable expectations than being right all the time because it’s hard to be right in the markets.

Here are some more distinctions between prediction and preparation:

Prediction: The S&P 500 will finish the year at exactly 2,731.74.

Preparation: Stocks can always finish in a wide range but they’re up roughly 3 out of every 4 years on average and when they’re up it’s typically by double-digits but when they’re down they’re typically down by double digits.

Prediction: When the 10 year treasury yield hits 3% the next stop is 6%.

Preparation: No one can guess the path of rates. Rising interest rates mean short-term pain in bonds but higher expected returns from the improved yields.

Prediction: It’s time to load up on stocks and go all-in.

Preparation: What’s the right amount of money I should have in stocks based on my risk profile and time horizon?

Prediction: It’s time to get out of stocks completely and go to cash.

Preparation: What’s the right amount of cash and/or high quality bonds I need to get me through the ineviable downturns in stocks?

Prediction: The Brexit vote is sure to lead to a market crash.

Preparation: The reaction to the news is always more important than the news itself, and investors often have counterintuitive reactions.

Prediction: Stocks have risen too far, too fast so they’re overdue for a huge pullback.

Preparation: Higher than average returns will eventually lead to lower than average returns, but it’s impossible to guess the timing of that mean reversion.

Prediction: Stocks have fallen too far so they’re sure to see a rally soon back to my estimate of fair market value.

Preparation: Volatility in both directions tends to be higher when stocks are in a downtrend so it’s best to prepare for a wider range of outcomes during a free fall.

Prediction: Here’s exactly what’s going to happen when the market opens tomorrow…

Preparation: Here’s exactly what my investment plan says I should do regardless of what happens in the market tomorrow…

Prediction: The best performing asset class in 2019 will be…

Preparation: Diversification means never having to guess the best performing strategy, region or asset class.

Prediction: The stock market is going to crash this year.

Preparation: The stock market is going to crash a handful of times in my investing lifecycle but I have no idea when they will occur.

Prediction: This will be the most challenging market environment investors have ever lived through.

Preparation: I’ve created a portfolio that is durable enough to handle a variety of market environments without having to guess the exact outcomes in advance.

Prediction: Is ego-driven.

Preparation: Requires self-awareness and humility.

Prediction: Offers a false sense of comfort because it gives the illusion of control.

Preparation: Offers no guarantees but does bake in an unknown future.

Prediction: Deals in post-mortems about what went wrong.

Preparation: Deals in pre-mortems about what could go wrong.

Prediction: Is outcome-based.

Preparation: Is process-based.

Prediction: Is obsessed with certainty.

Preparation: Builds uncertainty into every decision.

Prediction: Here’s what’s going to happen.

Preparation: Here are a number of scenarios which could prove helpful in planning.

Prediction: Focuses on trying to right all the time.

Preparation: Helps you avoid making unnecessary mistakes.

Further Reading:
Expert Judgment or Lack Thereof


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