Friday, April 8, 2016

Certainty is Absurd

Sometimes I read an excellent column somewhere and refer my readers to it while trying to build on the author's ideas a bit. I read a column today by Adam Butler posted at Advisor Perspectives that is such a column, but it is so well written that I don't find much to add.

The information in Adam's column isn't new research. It is, instead, a well-laid-out argument consisting of prior research showing that no one, not even those identified as experts, can reliably pick winning stocks or time the stock market, or predict the future in any of a broad range of disciplines, for that matter. He includes a wonderful quote from Voltaire, “Doubt is not a pleasant condition, but certainty is absurd.”

Adam suggests as an alternative to attempting to predict future market returns, advisers use “forecast-light methods.” In other words, if we can’t predict the future, our plans should minimize sensitivity to critical predictions.

Voltaire's quote is spot on. Accepting uncertainty in retirement planning is uncomfortable (Do I have enough savings to retire? Should I work another year just in case? What if I buy an annuity and only live a few more years?) but unavoidable. Retirement finances are so unpredictable that certainty is, indeed, an absurdity.

I find the framing of this argument intriguing. If a fortune teller told us he could predict the future, we would say, “Prove it.” In the investment world, people claim they can predict the future and say, “Prove I can't.”

It usually doesn't work that way and there is scarce credible evidence that anyone can outsmart the market for more than just a few years. (My favorite example is Bill Miller, see “Losing Money with the Best Mutual Fund Manager of All Time.”)

I'll stop talking now and send you to Adam Butler's post. Enjoy!

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