By Dr. James M. Dahle, WCI Founder
Q. There are so many opinions out there among gurus and “talking heads” about what the stock market, interest rates, inflation, housing prices, and cryptocurrency are going to do in the future. I’m not sure who to listen to. Any advice?
A. The CXO Advisory Group once looked at thousands of stock market predictions by dozens of financial gurus over a 15-year period. It found that the gurus (ie, public commentators) were only correct around 47 percent of the time; on average, an investor would have been better off simply flipping a coin. Gurus get paid for having an opinion, not for being correct. In fact, marketed properly, one good (or perhaps lucky) prediction can cement a commentator’s reputation for decades.
However, the truth is that “nobody knows nuthin’.” When investors realize there is no reliable resource out there that will give them the future returns of various investments or the direction of interest rates, it can be an immensely freeing experience. All of a sudden, those investors realize trying to game the system is a waste of time and energy. Instead, they can concentrate on the factors they can control, such as how much they earn, how much they save, and their overall mix of investments.
Some people think they really can make good predictions. I propose an exercise. Get a notebook. Every time you have a prediction about the future performance of a particular investment, write it down. Be specific. Don’t just write, “I think Tesla will do well.” Write, “I think Tesla will outperform other large-growth companies by at least 3 percent over the next six months.” Do the same thing with interest rate projections, housing prices, inflation, and anything else that you think you can predict with any degree of accuracy. Circle back and see how many of your predictions turned out to be correct. Within a year or two, you will likely convince yourself that your crystal ball is just as cloudy as anyone else's. As investors, we are not always rational. Retrospectively, we believe it was much easier to predict the future than it was. Only honest evaluation of an exercise like this can reveal that bias.
How Should You Invest?
There are many types of investments, or asset classes. These include various types of stocks, bonds, real estate, commodities, currencies, precious metals, and others. An investor need not invest in everything—and in fact, there are no “called strikes” in investing. If you do not like a particular investment, you can take a pass. There will be another “pitch” coming soon. However, every asset class is likely to have its day in the sun. These periods of time are usually preceded and followed by periods of underperformance. These investing cycles are natural and should not be a cause of worry to a long-term investor, especially since the cycles are far shorter than a typical investing career.

Do you consult with Zoltar before investing? What makes you think you can predict the future any better?
The natural inclination of an investor, unfortunately, is to “performance chase.” Investors, as a whole, pile into investments after they have done well and seem to bail out of investments just before they start doing well again. This results in buying high and selling low repeatedly. Done too often, this can prevent an investor from reaching even reasonably modest financial goals. One of the best ways to avoid performance chasing is to use a static asset allocation and rebalance periodically.
A static asset allocation means that you divide your portfolio among the various asset classes you wish to invest in and assign a percentage to each investment. Perhaps you have decided to invest 30 percent in U.S. stocks, 20 percent in international stocks, 25 percent in bonds, and 25 percent in real estate. Going forward, no matter how each of these asset classes perform, at the end of the year you rebalance the portfolio back to the original percentages. If bonds have had a particularly good year and stocks did poorly, perhaps your portfolio now consists of 25 percent U.S. stocks, 15 percent international stocks, 32 percent bonds, and 28 percent real estate. So you sell a little bit of real estate and a lot of bonds to get back to your original 30-20-25-25 asset allocation. The next year, perhaps international stocks do particularly well, so you sell some of that asset class at the end of the year and buy more U.S. stocks, bonds, and real estate.
In the early years, investors often do not actually need to sell the overperforming asset class. They can simply direct new contributions at the underperforming asset classes to keep the portfolio in balance.
Maintaining a static asset allocation and rebalancing periodically ensures that investors are constantly selling high and buying low—or at least not consistently doing the opposite. More important, investors are maintaining the level of desired risk in the portfolio. The best part of this approach is that it does not require investors to know anything about what is going to happen in the future to be successful. Investors are freed from trying to divine future performance. They are much less likely to mistakenly assume that past performance indicates future performance, an idea so bad that mutual funds are required by law to tell you that such guarantees can never be made.
Successful investors know that investing is a single-player game—them against their goals. They avoid making mistakes due to the fear of missing out (FOMO) and stick to their written financial plan. They know that reaching their goals depends far more on saving enough money and risk control than about “hitting home runs” with their investments. Just as lots of singles and doubles win baseball games, slow and steady saving into a periodically rebalanced static asset allocation leads to a life free of financial worry.
[This article originally published at ACEPNow]
Man simple but not easy! Just like Rick Ferri writes the same book over and over again, Jim you’re forever going to have to say this message over and over!
You should invest with your Brain and intelligence. Tony Robbins referenced a billionaire that have made all of clients wealth surge up even in bad markets. The asset allocation was in many different variations but was with a framework like the following:
40% long-term bonds
30% stocks
15% intermediate-term bonds
7.5% gold
7.5% commodities
Looks a lot like the permanent portfolio:
25% stocks, 25% long treasuries, 25% cash, and 25% gold.
The problem with that sort of approach is that the downside protection costs too much. Most markets are good, so you don’t want to give up too much of the good times just for protection. That sort of portfolio is 30% growth and 70% protection.
Hey Jim I agree that during accumulation that this type of risk parity portfolio gives up a lot of upside, but do you think it is an optimal decumulation portfolio given the downside protection? Or is it just as optimal and even simpler to just stick to a traditional stock/bond portfolio during decumulation and during a bad bear just sell bonds ? I guess the argument for having specifically long term treasuries/cash/gold is the low correlation to stocks in different market conditions ala harry Browne, but would seem to me an asset allocation of total US, total international, and intermediate term treasuries would already be enough to protect against bear markets, high interest rates, inflation. I never read Harry Browne, but if I wanted to lower my risk and dampen volatility I would just add more bonds- what am I missing? Why has this permanent portfolio been so popular?
Decumulation is a long time for many of us. Could be 30-50 years. You’ll need some growth to keep up with inflation.
I think the main components of a portfolio should be stocks, real estate, and some bonds/cash preferably with at least some of it indexed to inflation a la TIPS or I Bonds. If you want to add something beyond that, it should be in limited amounts.
Manure has low correlation with stocks. That doesn’t make it a good investment.
The permanent portfolio has not been popular the last decade! There was a lot more interest the decade before that.
The notebook idea is classic. I can be wrong about the direction of the market every day and twice on Sundays.
A purely static portfolio is the place to start. For most of the wisest folks I know, it’s also the place to end.
Sorry, this was supposed to be a general comment, I can’t seem to shake an accidental click on the wrong reply button…
I think Ray Dalio has an all-weather portfolio whose purpose is to 1) minimize downside during times of trouble in a particular sector, and 2) participate in upside when the market in general is good looks something like this:
30% equities / large cap
15% commodities
15% short-term bonds (US)
40% long-term bonds (US)
He goes pretty heavy on the bonds/fixed income, but I think this is a pretty sane asset allocation to consider as well.
But I think asset allocation/bankrolling really depends on your goals and personal risk tolerance. I think for me as an example, I’m much more oriented towards:
60% of portfolio as “sane”
40% of portfolio as “trying to hit a home run”
This is just mainly due to personally having a net worth goal that would be impossible to achieve with a 6-figure income job, compounding over many years. Thus, without my 40% of “trying to hit a home run,” I’d never read my net worth goal as an example.
You guys know about this post, right? Lots of portfolio discussions and sample portfolios there:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/