Top of Mind: Never assume and other tips for 2021
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To begin 2021, I’ll focus this edition of Top of Mind on several big consensus views and assumptions about the economy and the markets, including where they could be wrong, what that could mean from an investment standpoint, and how asset owners might want to play the possibilities in their portfolios.
Why spend time contemplating consensus? Sometimes we benefit from the wisdom of crowds. Large groups of market participants may point us to the most likely outcome and provide a sense of what’s priced into markets. Consensus can also form a base case against which divergent hypotheses can be tested. Of course, consensus can also be wrong, and considering that possibility may help us uncover hidden risks and prepare for surprises, both from a mental standpoint (don’t panic, be ready to act) and an asset allocation standpoint (e.g., ensure that a portfolio is diversified across a wide enough range of outcomes relative to consensus). In addition, for those who have strong conviction in a particular non-consensus view, there may be a meaningful risk/reward opportunity. When consensus views prove wrong, the market implications can be dramatic.
