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Investing Blog Roundup: Economic News and Predicting the Future

It seems as if every time I see an interview with a fund manager, a high-level fund company executive, or a famous economist, the interviewer asks the expert to predict the future in one way or another — “given [any recent piece of economic news], what do you expect to happen with [some particular investment or asset class]?”

I’ve never understood the desire to ask these questions. Even experts can’t predict the future.

That’s why I particularly enjoyed this reply from Vanguard’s Chief Economist, Joe Davis, during an interview in the most recent In the Vanguard newsletter:

“I encourage our clients to try to minimize the attention they pay to economic news, because I think that can actually lead to the pitfall of wanting to react.”

(The interview is available online here.)

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Comments

  1. Even watching the news last night, the anchor was running through the daily market results and had a quip as to what caused each market to rise or fall. “Commodities were down due to manufacturing slowdown in China. The loonie was down as investors rushed to the safety of the greenback amidst fears over the Euro.”

    Thanks for the mention!

  2. Mike, reading Darrow K’s article on rebalancing, I again have to wonder why this is so apparently an amorphous topic. Opinions vary from “never rebalance” to “rebalance based on percentages” to “rebalance based on a fixed time frame” – all of which leads the individual investor to feel nothing but confusion. Why do you think consensus is so hard to achieve on this point?

  3. Mike, thanks for the link, and have a great weekend!

    Larry, perhaps part of the problem is that when looking back, whether or not rebalancing was helpful depends on how the asset classes ended up performing. I think that is John Bogle’s point identified in Darrow’s article.

    Also, more often than not, stocks outperform bonds. So not rebalancing tends to creep up the stock allocation, allowing for higher returns as well as higher volatility. Rebalancing allows you to maintain the appropriate risk for your strategic asset allocation.

  4. Larry,

    Wade beat me to it. In general, rebalancing should act to reduce returns because, more often than not, you’ll be selling the asset class(es) with higher expected returns to buy more of the asset class(es) with lower expected returns.

    As far as choosing one rebalancing frequency over another with the hope of choosing the one that results in the highest returns, it’s no different than the difficulty people have with any short-term market timing.

    For example, imagine you’ve decided that, for the long haul, you want your allocation to be 60% stock, 40% bonds. But right now, you’re currently at some other allocation — say, 10% off in either direction.

    The question of should you rebalance right now as opposed to at the end of the year, as opposed to on your next birthday, etc. is simply an attempt at trying to guess which asset class is going to perform best over the next several months. Such predictions are difficult to make with any sort of reliable success.

  5. Thanks to both of you. I have found on a couple of occasions when I’ve been tempted to (but didn’t) rebalance, the market has later “rebalanced” my accounts automatically for me simply by virtue of normal market fluctuations. There was a time when I felt I had to be very precise in my asset allocations, but I’m coming around to think that deviations of 5% or so matter little in the long run. I do think as I get close to retirement that a more conservative allocation is most likely prudent.

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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