Avoid the Prediction Addiction
In 1968, Paul Ehrlich also wrote a best-selling book called The Population Bomb. Drawing on his observations with other animal species, the premise of the book was simple. The world was already overpopulated and still growing exponentially. The earth didn’t have enough resources to feed humanity. The result was inevitable. There would be mass starvation leading to nuclear world war, resulting in even worse environmental damage and more starvation.
Can Experts Predict the Future?
They usually have impressive credentials to their name, and they surely must know more than we do. But while experts can often explain in detail about what has already happened, it’s an open question of how accurate they are at predicting what will happen in the future.
Philip Tetlock, noted academic and author, has made a living out of testing the accuracy of forecasts. He conducted a study that included 82,361 expert forecasts. To make the analysis simpler he grouped the forecasts into three possible alternatives.
Groupings were based on whether the forecast was for:
1. The status quo remaining.
2. More of something; or
3. Less of something.
So, how impressive were the experts at picking which of those three options the future had in store?
Well, not very good as it turned out.
Tetlock found that experts performed worse than they would have if they had simply assigned an equal probability to all three outcomes.
If this is true of general social sciences, how much better do you think experts will be at predicting the share market?
Not very much.
If you think about it, the price of a certain stock, or share is already a prediction of the future profits of a company. What’s knowable is in the price. To predict shares beyond a general trend is the equivalent of trying to predict a prediction. That doesn’t sound like an easy task and it’s not. Predicting the stock market is very difficult as no one can predict occurrences in the every-day economy.
Fortunately, good investment outcomes don’t depend on guru predictions. They depend on having a plan, adjusting the plan as required to stay on track, and staying disciplined.
Our investment providers follow an evidence-based approach to strategic asset allocation. We then monitor your investments relative to your needs, recommending prudent adjustments along the way when your circumstances, goals, or priorities change. That’s our job and it’s one we love to do. So, you can relax and enjoy your life and your wealth, with the confidence that you are invested prudently.
Socially Responsible Investing
Socially responsible investing (SRI) has become an important consideration for many New Zealand investors as they become more aware and considerate of where their hard-earned savings are being invested.
SRI can be implemented on a spectrum ranging from very soft changes to more stringent approaches.
ESG Integration
This is the first step along the responsible investing spectrum. ESG integration is the consideration of environmental, social and governance factors when making investment decisions.
Negative screening
When SRI funds are selecting which companies to invest into, the most common approach is to utilize a ‘negative screening’ process. This specifically seeks to exclude certain companies or industries assessed as having a negative impact on the environment (e.g. high carbon emissions) or on society (e.g. selling tobacco).
Positive screening
Some SRI funds allocate to firms deemed ‘best-in-class’. For example, an electricity provider using predominantly hydro power will get a higher allocation than ones with a mix of hydro and perhaps coal burners. This is known as a ‘positive screening’ process.
Thematic investments
Rather than starting with the broad market and excluding companies, thematic investing instead selects only companies with a common theme. This could be environmental themes such as clean energy, or forestry, or social themes such as healthcare innovation, aging population or supporting companies with the best inclusion and diversity records.
Impact investing
This strategy invests into projects that promote a positive social or environmental impact, often ahead of the pursuit of financial gains. The investment is often used to fund specific projects via securities such as green bonds (e.g., Auckland council raised $200m specifically earmarked to help fund Auckland’s electric trains and associated infrastructure).
Due to the degree of subjectivity surrounding the merits of different SRI strategies, not all investment funds attempt to satisfy the highest possible SRI objectives of all potential investors. Instead, they seek funds that place an emphasis on supporting higher levels of social and environmental responsibility, whilst remaining faithful to the prized investment attributes at the core of our investment philosophy — favouring low cost, widely diversified and non-speculative investments.
That approach is to build robust portfolios that accommodate as many responsible investing preferences as possible, without compromising philosophy.
The above articles were provided by Consilium in their report and communication with FoxPlan.