Forecasting the investment weather

What does the weather in Cornwall have to do with your investment portfolio? Richard Wood explains.

What’s the weather going to be like in 2021? We have a growing wealth of data, science, models and common sense on which to build forecasts. Yet despite generalisations – such as it’s usually sunny and warm in the summer and cold and frosty in the winter – all we know is that the day-to-day, month-to-month and even year-to-year variation is high.

‘Expected’ returns on portfolios are a little like the ‘expected’ weather in the UK. Investors should never believe that expected returns 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.

Despite our deeply embedded childhood memories of everlasting warm and sunny summers, nothing is certain. 2018, for example, was the second-sunniest summer on record, but long-runs of unpredictable summer weather are the norm, not the exception.