Forecasting risk

The danger with forecasting is that our analysis may be accurate, based on the evidence at hand, but the outcome may be completely different because of some unforeseen event. Someone at a live food market in Wuhan develops a respiratory fever, crude oil falls to minus $37 per barrel, the Fed dumps $3 trillion into financial markets in just three months, China imposes economic sanctions on Australian coal, and Russia launches a full-scale invasion of Ukraine — all of these events are unforeseeable and likely interconnected.

So why do we persist in making forecasts and basing investment decisions on them?

Consider the alternative.

An inability to make forecasts would destroy the global economy. A farmer consults weather forecasts when planning what crops to plant, how much to plant, and what fertilizers are required. A retailer may similarly consult economic forecasts when making decisions to stock her shelves. Forecasts are necessary to plan for future events, whether they be crop harvests, retail sales or longer-term investments.


We need to recognize the uncertainty surrounding forecasts. The more complex the environment, the higher the degree of risk.

Attempting to accurately forecast future events is futile. And anchoring investments to a particular outcome is risky. It is safer to simply estimate whether the risk of a particular outcome is high or low.

For example, we may believe that the risk of a hard landing in the next 12 months is high and position our investments accordingly. But bear in mind that no particular outcome is certain and we need to retain sufficient flexibility to adjust our strategy if the probability of an alternative outcome should increase.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” ~ Samuel Clemens