Living in Boston — where it’s not uncommon to see some snow still left on the ground in April — people can be prone to their fair share of complaining. Myself included. And so it wasn’t surprising when a recent discussion with my friend David ended up on the topic of the weather.
By way of background, David is a dermatologist. In fact, at the hospital where he works, he’s the head of the department and spends a good deal of his time doing advanced research. So, I felt like I was consulting a qualified authority when I asked him the following question: “Living in the Northeast, with our gray winter weather, can I at least take comfort that we are at lower risk for skin cancer?”
David’s response was quick, but qualified. “Yes, but for that same reason you are probably also severely deficient in Vitamin D.”
In other words, as an economist might say, there is no free lunch. Yes, I’m at lower risk for cancer, but now I’ve got a vitamin deficiency to contend with.
As I thought about this, it occurred to me that many, if not most, things in life involve less-than-perfect choices like this, including our finances as much as anything. Yes, the investment industry today is endowed with unprecedented talent and resources. Unfortunately, however, the reality is that none of this can help us accomplish that which would be most valuable: to predict the future. If you could predict your future income with perfect accuracy, or if you knew which way the stock market was going, or if you knew what the government was going to do with Social Security – if you knew all of these things, it would make it much easier to map out your financial plan. Unfortunately, however, despite all of the investment industry’s resources, there is just no such thing as a (working) crystal ball. In fact, the industry’s resources and penchant for making intelligent-sounding forecasts sometimes gives us the illusion that we know more than we do, but this can end up being, at best, a waste of time.
So how do we reconcile this conundrum? If you have imperfect information, but you need to draw some conclusions in order to plan for your financial future, what should you do? Fortunately, when it comes to your investment portfolio, there is one very useful solution. It’s called asset allocation — that is, the split between stocks, bonds and cash in your portfolio. While there is no way to predict the direction of the economy or of the stock market, you can protect yourself to a great extent through effective asset allocation. For that reason, when you evaluate your own portfolio, this is where I would focus most of my efforts. Lots of academic research supports this approach, and it’s certainly the approach I take with Mayport clients.
Thankfully, the weather in Boston seems finally to have turned the corner. Hopefully we will all get a chance to get outside before too long — and maybe catch up on a little Vitamin D. (But, as David points out, don’t forget the sunscreen!)
