Unquestionably Unpredictable


In markets, randomness abounds and prediction is impossible. Nonetheless, many buy or sell based on an analyst’s recommendation or a personal deduction. Investors try to account for and anticipate all factors — an already futile feat becoming increasingly more difficult in a globalized, ever more connected world. Ironically, what never seems to be accounted for in portfolios — whether one believes markets are random or not — is that which is unquestionably unpredictable.

Some say the mortgage crisis and resulting Great Recession could be forecast; analysts were able to both detect and correctly anticipate the black swan of 2008. Undeniably, many conversations have tested my endurance and manners as I listen to “experts” tout their abilities and proclaim the market is over or undervalued, or it is time to get in or get out. Not only do these so-called “gurus” fail to understand the randomness of markets (a topic for another time), they make absolutely no accommodations for events, not even directly related to earnings or economic policy.

If one stops to think, it only takes a moment to list myriad events of the recent past that: 1) Were completely unpredictable, 2) Had no direct tie to an economic indicator or stock, and 3) Dramatically impacted markets and economic progress. To mention just a few from this year alone: an extremist’s killing spree in Oslo, the overthrow of President Mubarak in Egypt, NATO’s war in Libya, the chief of the International Monetary Fund (Dominique Strauss-Kahn) accused of rape, the killing of Osama Bin Laden, and certainly those caused by mother nature (e.g. an earthquake in Japan, a tornado in Missouri — the United States’ deadliest ever recorded)

The lesson? Whether or not you believe markets are random, and whether your broker or investment advisor “predicted” (aka guessed) correctly once or twice, your portfolio must accommodate events that are unquestionably unpredictable. The issue is not what your portfolio has done, rather is your portfolio properly allocated to weather any storm — both figuratively, and indeed, literally.

In the future, we can have stimulating debate and discussion with regard to the predictability of markets themselves. For now, consider events and occurrences are categorically unpredictable when allocating assets and assessing your investments.

Jonathan Citrin is founder and CEO of CitrinGroup, an investment advisory firm located in Birmingham, MI. He is an adjunct faculty of finance in the School of Business at Wayne State University.

Founded in 2003, CitrinGroup specializes in portfolio management and advises clients on investment planning.

Contact: 248-569-1100 or www.citringroup.com