22 Aug 2014 Dow 6000?

If you visited the Yahoo Finance web page on Wednesday, you may have seen this headline: “Dow 6,000: Wild prediction or worthwhile caution?”

The article behind the headline is about a guy named Harry Dent. Dent has made a number of market predictions over the past few decades–his latest being that the Dow will plummet to 6,000 by late 2016 or early 2017 – the Dow recently closed around 17,000.

Like many people who make predictions in large volumes, Mr. Dent has gotten a couple right. In the late 1980s he forecasted that Japan would enter a period of extended economic slowdown. In the early 1990s he predicted that the Dow would run to 10,000. Both predictions came true, even though they flew in the face of popular sentiment at the time he made them.

Wouldn’t it be nice if we’d finally identified our long sought after guru with the crystal ball?  Unfortunately, Dent has had more misses than hits. Here are just two examples:

•  As confirmed by the copy of The Roaring 2000s (written in 1999) sitting in Beacon’s Raleigh office library, Dent’s prediction for an extended bull market was flummoxed by the bursting of the dot-com bubble and the financial crisis.

•  In 2011 he said the S&P 500 would fall 30-50% in 2012. It was actually up 13.4% on the year.

But before we get too down on him, we must realize that Harry Dent is not the only one guilty of making predictions. We all do it.  In fact, predicting is a part of the human condition. As discussed in this Freakonomics podcast, we are seemingly hardwired to attempt to construct a rational explanation for the irrational, complex systems making up the future. The thing is, we’re terrible at it–“expert” or not.

However, Mr. Dent does know what he’s doing.  Our current culture is one that rewards greatly those who get “the big one right” while at the same time allowing those who make grand predictions that never formulate to quietly continue on with little or no repercussion.  It’s worth noting that it’s often the same person.

So, should we pay attention to the headline grabbing predictions that become rampant during extended bull markets like we are currently experiencing?  Maybe, but it’s not what you think.  It would be folly to attempt to adjust our portfolios to prepare for a specific event each time a convincing sounding media pundit made a wild prediction.  Indeed it’s unfortunate that there is a rather large group of investors that do just that.

Instead, what if we used the very existence of such predictions as an indicator that it might be time to pay a little more attention to our portfolio?  By rebalancing our portfolios and making sure that we are only taking the amount of risk necessary to accomplish all the things that are important to us we can be confident that we are properly positioned to weather market fluctuations regardless of whether Mr. Dent is correct this time.