Acuity 45: Forecasting the investment weather

‘Expected’ returns on portfolios are a little like the ‘expected’ weather in the UK. We have a growing wealth of data, science, models and common sense on which to build forecasts in both areas. Yet despite generalisations - such as it’s usually sunny and warm in the summer and cold and frosty in the winter - we all know that the day-to-day, month-to-month and even year-to-year variation is high.

Investors should never believe that expected returns – like the weather – are accurate, single point, consistent outcomes. Generalisations, grounded in empirical data, sensible rules of thumb and common sense are immensely important starting points for useful, informed discussion and scenario modelling.