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From Pragmatic Capitalism:
I love Larry Swedroe’s work. If you haven’t read some of his books on investing then you’re probably less informed than you otherwise could be. But Larry also believes in the “forecast free” view on indexing. And while it’s a nice message and one that we can all relate to (forecasting is hard), I think it misrepresents what we all do when we allocate assets.See, for example:
In a recent blog post Larry says that prognosticating the future is “the occupation of charlatans”. That’s pretty harsh if you ask me. But we see this all the time with indexers. They say that they don’t predict the future, don’t engage in trying to outguess the market and that they leave that up to the “active” gamblers. And then they whip out their handy dandy set of backtested results and datamined “evidence” and say “buy low fee index funds and don’t listen to anyone who makes a forecast”. Or they look at past results and conclude that certain “factors” should be weighted in a certain way because they have shown evidence of good performance. Or they choose to actively deviate from global cap weighting (as all indexers do) and then claim they’re still not predicting the future.
This is all fine except for one small problem – by using a rear view mirror approach the indexers are all making forecasts. They’re just extrapolating the past into the future in what amounts to little more than “well, asset classes have averaged X% per year for XXX years so that’s a reliable assumption going forward”. This could be true. And it could also be completely wrong. They’re making a fairly smart forecast based on a fairly long dataset, but it’s not like they’re not making a forecast about the future.
Worse, as I’ve noted recently, indexers all deviate from the global market cap weighting because no indexer can buy the total world’s financial assets nor would they want to. And when you deviate from global cap weighting you are, by definition, an active investor. And you are, by definition, making a forecast about how your allocation will perform in the future. I don’t care if you look at some historical dataset and extrapolate it forward or if you focus on trying to understand the world for what it is and make probabilistic forecasts (as I do). We all make forecasts about the future. Some do it in rather silly ways while I’d argue that some are more realistic and calculated. But all of our portfolios are constructed by making forecasts and implicit assumptions about how certain asset class weightings will help us achieve our financial goals.....MORE
UPDATED--Are You a Recent Graduate Who Hasn't Found a Job? Consider Becoming a Charlatan
or:
Follow-up: Choosing the Charlatan Career Path
And;
"Pseudo-Mathematics and Financial Charlatanism...."
Possibly related:
Should have seen it coming.
