I am a buy and hold investor, but two recent lectures by Niall Ferguson, a Harvard Economic-Historian, make a strong case for the impending economic collapse of the United States. He predicts default and/or rampant inflation and suggests re-allocating one’s portfolio to a mixture of gold and foreign investments. I can already hear you saying “no, this time won’t be different, America will recover”, but I suppose I just wanted to hear it straight from the source. Any words of wisdom would be most appreciated.

At any given time, it is not difficult to find somebody professing to know the short term future of the economy or the capital markets.  Quite often these people are highly regarded professionals armed with plenty of data to support their claims.  And quite often they are wrong.  History is replete with examples of how investors made wholesale changes in their portfolios based on excessively optimistic or pessimistic predictions, only to regret it deeply after the opposite occurred.

We believe that the future is fundamentally unknowable, and thus cannot be predicted with any precision. We believe investors could use their time and energy and brainpower much more effectively by controlling what they can control instead of trying to predict what cannot be predicted. We do this for our clients and with our clients by maintaining portfolios that are designed to address a wide range of economic and market climates, including inflation.

When we evaluate predictions that are in wide circulation or that are made by authorities we respect, we believe it makes sense to consider how a portfolio might protect an investor if the prediction materializes — and if it does not.  When we think about both of these possible scenarios, quite often we find that the logical solution is to maintain a portfolio that is well-balanced and thoroughly diversified.

Like you, we also have faith in the capital markets, and because the future cannot be known in advance, we are always quick to acknowledge that any given prediction may actually occur.  The problem, of course, is that we cannot know that until after the fact, no matter how obvious or compelling the prediction may seem at the time.  The important consideration for most people should be this: If they radically alter their well-balanced and thoroughly diversified portfolio based on a prediction, can they accept the financial and emotional consequences if the prediction fails to materialize or even if exactly the opposite occurs?

We certainly saw a lot of failed predictions over the last three years, yet most people who maintained their 50/50 or 60/40 portfolios through it all experienced significantly lower levels of volatility during the decline and participated very meaningfully in the recovery.  By contrast, many investors who dramatically altered their portfolios based on predictions made with table pounding certainty experienced all or most of the decline and in many cases were out of the market on the sidelines when the great market recovery of 2009 and 2010 got into gear.

It is also interesting to look back and ask how many experts, if any, predicted anything like that robust recovery. And if you had read or heard such a prediction in January or February of 2009, after a huge, depressing market slide, would you have recognized it as valid? Would you have invested your money in the stock market at that time?