Most of us are familiar with and have had an experience or two with the popular Magic 8-Ball. For those who don’t know what I’m talking about, the Magic 8-Ball is a large sphere that looks like a billiards eight ball with a triangular response window on the bottom. One holds the Magic 8-Ball, asks a yes-no question, and then turns it over to see the response in the window on the bottom.
The responses vary from affirmative to non-committal to negative. The standard Magic 8-Ball has twice as many affirmative responses as either non-committal or negative, so it is skewed to provide positive responses.
Predicting the future is hard even for the oracular Magic-8 Ball. Investing is no different. In 2022, we’ve been reintroduced to price and rate volatility, rising interest rates, and rising inflation. These are features of financial markets, not bugs even though they can be inconvenient. We know growth doesn’t always go up and we’ve been reminded that inflation and rates don’t always go down. Yes, those of us who were alive and conscious of financial markets in the 1970s and early 1980s remember all of this, probably with some angst.
We’ve been preconditioned over the past several decades to expect stock and bond prices to always go up. While that may be true over long time horizons, each of us must ask will that be true over my specific time horizon? The appropriate Magic 8-Ball response to that question would be a non-committal “Cannot predict now”. Of course, we all want the affirmative response “It is certain”, but we all know nothing is certain in life except death and taxes as Benjamin Franklin once wrote in a letter.
So, the natural next question is how should I invest my portfolio based on my time horizon and an uncertain outcome? The answer is, “it depends” (not a Magic 8-ball response). Multiple factors must be considered, including your unique financial situation and tolerance for risk in addition to the potential for various outcomes that could occur.
The key to making the best decision is balance. A balanced approach that factors in your unique circumstances as well as various potential outcomes will offer you the best path forward to achieving your life and financial goals. Remember, you want the odds in your favor. A balanced investment portfolio that considers potential growth (rising/falling) and potential inflation (rising/falling) will properly position you whether the Magic 8-Ball response for any of those scenarios is “most likely” or “very doubtful.