Despite it being most investors’ favourite pastime, we are terrible at forecasting; what we are much better at is talking about events that have happened as if they were inevitable. If a certain path has been taken it is difficult for us to believe that any other routes were ever feasible or even available. Whilst this creeping determinism or hindsight bias seems somewhat harmless, it is a damaging trait, which perpetuates outcome bias and leads us to believe that any past decisions made that were contrary to what actually occurred were foolhardy. Diversification rarely looks sensible after the event – why didn’t you just own the best performing assets?
Having said that it is a serious issue for investors, I will now lurch toward frivolity. If we go forward ten years, which outcomes will we be claiming were obvious ten years prior? Some of the hypothetical comments below are more credible than others – I will let you decide which:
– ‘Value investing was so depressed and had underperformed for the best part of a decade – a recovery was inevitable’
– ‘US equities were the most richly valued major equity market by some distance, they were due a period of low returns and relative underperformance’
– ‘ The expected returns from a traditional 60/40 portfolio became so low it was simple common sense to increase exposure to alternative strategies, including hedge funds’
– ‘The US tech giants were expensive and facing severe regulatory scrutiny – their time in the sun ended a decade ago.”
– ‘With yields so low it is amazing that investors still held so much duration in their portfolios’
– ‘The vast flows into passive strategies were always going to highlight the flaws in cap-weighted indices, particularly in fixed income markets’
– ‘The Japanification of all major developed market economies was inescapable’
– ‘The return of inflation in major developed market economies was inescapable’
– ‘The long awaited stock pickers’ market finally arrived!’
Of course, we will actually be saying a host of different things – because the investment world is simply too complex, random and reflexive for us to make predictions with any level of confidence. Taking this into account by making prudent and humble investment decisions now, will mean that some of these choices may seem illogical to our future self – but that is a price worth paying.