The Economy is Unpredictable so Ignore It

With long time frames for compounding in the Child Millionaire portfolio, we have the advantage of not needing to worry about what is happening to the economy or financial markets in the short or medium term. This is a good thing because nobody knows what is going to happen to interest rates, unemployment rates, GDP or any other lead indicators. Anyone who claims he does is either deluded or lying.

 

As a case in point of how unpredictable the future is and how often the ‘experts’ get it wrong, have a look at the following graph from the Federal Reserve Bank of Philadelphia. The blue line is the real inflation-adjusted annual change in GDP for the US over the past 40 years. You can see how it has moved all over the place during boom and busts in the economic cycle. The red line shows the consensus view of economists on where US GDP was headed. You can see how the economists missed all of the booms and busts even when we were right in the middle of one such as the 2008 meltdown.

 

The Folly of Expert Prediction

 

The economists can’t get it right and we aren’t likely to either because there is simply too much (or sometimes too little) data and too many ways to interpret how different economic and non-economic forces interact. So in response to this uncertain backdrop, we need a category of assets to invest in and a system that can be set up and (almost) forgotten about, generating high returns and letting you get on with football practice or fishing or whatever other activity brings you and your child joy, knowing he or she is already financially secure regardless of what happens in the economy or markets.

 

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