If you were to head down to your local library (remember those?) and dig up some predictions from the 1950s about what the future was supposed to look like, you’d likely find lots of guesses about how we should all be zipping to work by now in our flying cars, riding home on conveyor belt sidewalks and living in invisible plastic bubbles.
What do all of these predictions have in common? None of them came true. And not one of them predicted anything remotely similar to cell phones, the Internet or Uber.
In fact, when you start to look at them, most of the forecasts people make about the future end up dead wrong if we happen to live long enough to see how things actually turn out. The reason for this is that we human beings all suffer from what Harvard psychologist, Daniel Gilbert, calls “presentism.”
Presentism means that, when we think about the future, we have no choice but to look forward through lenses that are firmly rooted in today’s word. As a result, what we think are reasonably accurate guesses usually turn out to be nothing more than amusing variations on our own current society, technologies and circumstances.
Presentism works in both directions, too. When we look at the past, we can’t help but judge the moral bankruptcy of slave owners or the obvious sexism of denying women the right to vote. But try to find any evidence of a debate on either of those issues 400 hundred years ago, and you might as well be trying to dig up a manual on aircraft safety from the 1600s.
The point is, whether we’re looking forwards or backwards, we’re pretty much stuck with present-tense lenses over our eyes. So why do we keep trying to predict the future?
Well, for one thing, it’s really tempting. If we actually could figure out what the future holds, we could avoid all the bad things that are going to happen and just stick with the good stuff. Plus, most of the time, most of us don’t really believe that we have our present-tense specs on at all.
When it comes to investing, if anyone actually kept track of all the guesses, forecasts and projections that have been made about the markets, commodities and interest rates – not to mention international currencies, real estate values or the price of oil – we’d find ourselves having quite a chuckle at the expense of Bay Street and all those talking heads on the 24-hour “news” networks.
You may have noticed, for instance, that when the market goes down, all the forecasters usually start calling for more pain to come. Similarly, when the markets go up, no one can seem to see any good reason why they shouldn’t keep on going up forever.
More often than not, these forecasts are the result of well-meaning people trying their best to look into the future, while being blithely unaware of the fact that all they’re really doing is projecting today’s circumstances onto tomorrow. The details may be different. But the core of any forecast about the future is almost always going to be much closer to a prediction of flying cars, than it is an accurate guess about who the next Apple, Facebook or Google is going to be.
The truth is, prognosticators are statistically no better than random chance at predicting the future. So what are we supposed to do with our portfolios, if we can’t rely on the advice of our favourite astrologer, tealeaf reader or market strategist?
Well, for starters, we can stop using our own “presentism” bias to try to predict the future, and begin looking instead for things that persist long enough to make random chance statistically irrelevant.
Take stocks as an example. Stocks have had a risk premium throughout the entire history of the equity markets. Risk premiums are the long-term rewards (“premium”) you get for accepting something that has an unknown result (“risk”). The reason we get the premium, is precisely because we can’t know what will happen until it actually does. If you, me or anyone else could accurately guess what was going to happen in the future, the risk would vanish – and so would the reward.
To make risk premium work in your favour, you need to have a large enough number of observations so that any short-term fluctuations cease to have an impact. It’s like flipping a coin. We all know there’s a 50-50 chance a coin will come up heads or tails. But you may have to flip that coin for a very, very long time until any short-term runs of heads or tails even out, and we start to approach the statistical certainty of 50-50.
In other words, to get an accurate result, we have to stick it out through all the unpredictable short-term ups and downs. But if we hang in long enough, we can start to see what’s really statistically true – and what isn’t.
For example, if you’re wondering whether you’d be better off investing your life savings for the next 30 years in GICs or in a sensible, diversified stock portfolio, that’s a question you can actually answer. If you’re willing to ride out the inevitable bear markets and stick around for a few decades, you’ll get a risk premium from investing in equities that’s several times greater than what you’d get from a “risk-free” investment like bonds or GICs.
What we can’t say with any degree of accuracy, is when those bear markets are going to come roaring in, or when the markets will sour and when they will fly. We can try. But it’s far more likely we’ll be predicting conveyor belt sidewalks than the next Amazon.
Alan MacDonald an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.