Negotiating Tip #39:
Sometimes It’s Best to Ignore What We Cannot Know
As a negotiator, you naturally want to know what is coming. In some fields, forecasts have become pretty good; for instance, weather for the next week. Unfortunately, economic forecasts are an altogether different story. Typical is the dreadful record of stock market forecasts.
At the behest of *New York Times* columnist Jeff Sommer, Paul Hickey, a co-founder of Bespoke Investment Group compared the annual Wall Street consensus forecast in late December with the actual level of the S&P 500 one year later for every year since 2000. As Sommer wrote, “the median forecast was that stocks would rise every year for the last 20 years, but they fell in six years. The consensus was wrong about the basic direction of the market 30 percent of the time. …The gap between the median forecast and the market return was 4.31 percentage points, an error of almost 45 percent. (Forget Stock Market Forecasts. They’re Less Than Worthless.) ”
So what are we to do when forecasts are no good? In many cases, the best advice is to ignore short-term fluctuations and concentrate on the long-term trend. Let’s apply that to investing in the stock market. Long-term historical data show that stocks outperform bonds over extended periods, but that stocks are far more volatile than bonds.
David Booth, for whom the University of Chicago Booth School of Business is named, advises: “Find a stock-bond mix that you are comfortable with. And if you realize you’re not comfortable, change it until you are — and then stick with it for years, and do better things with your life than worrying about where the market is going.”
How to respond to a catastrophe? Sometimes the best solution is to wait for it to pass. Suppose you had gone in to the 2007-2009 crash as an aggressive investor with 60 percent of your portfolio in stock and the remainder in bonds. As Sommer points out, that portfolio would have lost about 35.6 percent but it would have recovered entirely in two years.
Despite the catastrophic results during the crash, over the last 20 years, an aggressive portfolio with 60 percent stock would have done better than a more conservative one with only 25 percent stocks.