The Future Is Unknown, So Plan Accordingly
The future is unpredictable. Rather than betting on forecasts, diversification helps investors prepare for a range of outcomes. Plan, don’t predict.
I saw a great Forbes article recently that reinforced the fragility of forecasting using a quarter-century-old anecdote about the Pentagon changing the way they identify future threats. The change stemmed from a review of how quickly the geopolitical landscape evolves—yesterday’s adversaries can become tomorrow’s allies. Rather than focusing on one specific forecast, it was more prudent to be prepared for all possible outcomes.
This echoes what we often say at Dimensional: Plan, don’t predict. We all have views about what the future may bring: companies that will succeed, economies that will grow, markets that will take off. Markets set prices based in part on the aggregate of these expectations. So, market prices already represent a forecast of the future. However, some investors may let their personal forecasts drive their asset allocation decisions. Dogmatic adherence to forecasts dictates concentrated investments that fall short in the event the future differs from our predictions. Diversifying portfolios is a tacit admission that we don’t have a crystal ball. You reduce the range of outcomes by preparing for what you can’t see coming.
Country stock market returns are a good example of this. Going all-in on one country because you have a view on where their stocks are headed opens you up to a wide range of outcomes. The average difference between the best- and worst-performing developed market countries over the past two decades was over 50 percentage points. Get your call right, and you’ll look like a hero. Get it wrong, and you’ll be as apoplectic as when Chevy Chase’s character loses the rock paper scissors game in Vegas Vacation.
EXHIBIT 1
Best and Worst Yearly Developed Market Returns
2006–2025
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Diversification neither assures a profit nor guarantees against loss in a declining market.
CANADA
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