“Another misconception is that a good prediction shouldn’t change…you should make the best forecast possible today — regardless of what you said last week…” — Nate Silver, Author
Statistician Nate Silver became familiar to the general American public during the 2012 Presidential election when he successfully predicted the voting outcome in 49 of 50 states and all 35 U.S. Senate races. His book, “The Signal and The Noise,” addresses the history of predictability and discusses probable outcomes of everything from baseball batting averages to poker hands.
Is Silver prescient when it comes to global markets and other complex issues? To his credit, he candidly admits his limitations, like predictions regarding the advancement of global warming conditions. “When a prediction about a complex phenomenon (like global warming) is expressed with a great deal of confidence,” says Silver, “it may be a sign that the forecaster has not thought through the problem carefully, has overfit his statistical model, or is more interested in making a name for himself than at getting at the truth.”
One of the criticisms leveled at Silver is that he revises his predictions as new information becomes available. To some, this violates the spirit of predictions. Silver is puzzled by this reaction to his changing forecasts. Why, he wonders, wouldn’t everyone utilize new and dynamic empirical evidence?
Evaluating portfolio holdings on an ongoing basis while absorbing and then applying new economic data is the philosophy utilized by tactical asset managers, whether they are “do-it-yourselfers” or professional investment advisors.
Like Silver with his changing predictions, tactical asset managers monitor and analyze holdings periodically, and then based on new economic data and shifting market conditions, they rebalance the portfolio to include new investment themes. Some call this “Buy and Manage.”
This is contrast to “Buy and Hold” asset managers or investors, who purchase securities, frequently a broad index, and then simply wait for the market to reward their actions. This approach works best when markets are trending steadily upward, as a rising tide lifts all boats. The 1990s, laughingly called the “Dartboard Decade” (because one could sometimes throw a dart at the Dow and make money) by some investors, was just such an era.
Now, drastic market downtrends (like 2008) and volatility have replaced the “Dartboard Decade”, and many investors and investment advisors monitor and rebalance periodically. Especially those investors who are nearing or in retirement. The memory is still fresh for those who lost 37 percent (on average) of their portfolio value in the 2008 downturn.
Today’s markets are more complicated and chaotic, and many investors desire that their advisors adjust their holdings when conditions warrant, even if this means sometimes moving to cash and cash equivalents in times of extreme market turbulence.
Margaret R. McDowell, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121~www.arborwealth.net), a fee-only registered investment advisory firm located near Sandestin.