Why Investors Don't Predict Disaster

How can investors anticipate events that could crash their portfolios? Morningstar's John Rekenthaler looks at why people always assume that the future will resemble the past

John Rekenthaler 29 March, 2019 | 8:28AM
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Risk and reward

When allocating assets, it is customary to consider the possibility that future returns may differ from those of the past and to adjust one’s forecasts accordingly. Such efforts occur less often with standard deviations and correlations. For the most part, even among institutions, what happened before is expected to happen again.

The estimates of asset-class correlations that underlie investment portfolios, even when made by highly sophisticated parties, tend to be created as follows: watch what transpires over several years, assume that pattern will continue, and be surprised - even shocked - if something occurs that has never occurred before.

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About Author

John Rekenthaler

John Rekenthaler  is vice president of research for Morningstar.