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Predicting the Future


Everything we do in life depends somewhat upon a prediction that is often made unconsciously. Most financial affairs, however, should be conscious decisions, based upon experience and what knowledge we can gather

For many years my family has sat down on New Year's Eve to individually record our best predictions for the coming year. Then we open last year’s efforts and it's a good laugh.

No, I am not Nostradamus and yes, predictions are a fool's errand. But if you think about it, everything we do in life, in medicine and in money matters depends somewhat upon a prediction. Often it is unconscious, based upon experience, or snake-brain genetic wiring. Most financial affairs, however, should be conscious decisions, based upon experience and what knowledge we can gather in the available time. We do have to acknowledge that we make constant daily decisions, personal and professional, based upon inadequate data.

So short of making accurate predictions, economic or otherwise, let's look at the process itself. The trap that most futurists fall into is theorizing that we will be going into a "souped-up version of today's world rather than a radically changed world." We take what we think we know/observe about some aspect of our situation and magnify it. What this really boils down to is "...betting that innovation won't triumph." But man has certainly learned in the last century if there is a need, someone will find a better way to fill it.

And emotion plays a role in prediction. If you have a doom-and-gloom, Hobbesian view of life, then your economic predictions will be colored by that (e.g. buy gold and canned goods). Likewise a Panglossian, utopian cast to a hopeful future will show up as well (e.g. buy futures and take more risk).

Failed examples to predict correctly abound, in spite of our best efforts. Thomas Malthus notoriously predicted that population growth would outstrip the food supply. Wrong. After WWII the military assumed the next wars were going to be fought with even more tanks and aircraft carriers. Wrong. During the go-go days of the 1980s, the economic pundits predicted that the rapidly growing Japanese business model would sweep the world and Japan would become dominant. Wrong. Polling told us to expect that "Dewey Beats Truman." Wrong. And you can supply many examples more that come to mind.


Predicting anything correctly is so rare that as a society we have unconsciously accepted as a crutch the widespread use of probability, the not inappropriately named "odds." In medicine we accept statistical analysis/probability as "best practice" and "evidence based" until something better is developed. In pension planning the "experts" (hah!) have developed "Monte Carlo" (yes, Monte Carlo) scenarios as a major predictive factor in their work. (Google it) With our money and retirements at stake, of course.

The rapid advance of technology is one major wild card in extrapolating the past into the future. We do not know what will be developed or when or what its/their effect will be. Who could have predicted the internet? Even now we are constantly surprised by where it is leading us. Look at the recent Arab Spring, for instance. The internet's unknown impact reminds me of a quote attributed to the former premier of China, Zhou En Lai. When asked what he thought the impact of the French Revolution was he replied, "It's too soon to say."

Because the few who have been lucky at predicting economic trends are all ensconced on their yachts off Monaco and not available to us, we are left with Modern Portfolio Theory. This is a defensive mode that usually works better than anything short of blind luck, or marrying well, in managing our economic futures.

The short version of MPT is this: save regularly what you can, starting as early as you can, preferably in a tax deferred mode such as an IRA or 401k. Spread it in different investment areas that tend not to rise and fall together, like stocks, small, large, and international, bonds and real estate (e.g. REITS). Sell down the winning categories periodically, like once a year, and invest the gains in that year's underperforming categories. It's called "rebalancing," a disciplined form of "buy low, sell high." And do your buying and selling as cheaply as possible. In an era of low returns, transaction costs are crucial to your financial success. Voila, the simple, down and dirty version of what the best investment minds can (currently) come up with in lieu of accurate predictions.

Does it always work to minimize loss and try to keep gains steady? Alas, no. The 2008 market swoon proved that. But it's the best of what we have.

So start young and stay the course. MPT is the best chance you have at getting rich slowly. For those of you who still want to get rich quickly, and marriage to an heir/heiress is out, good luck.

And if you want to ask my prediction of what the next Big Financial Success will be, please, remember my New Year's Eve record.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice