The Importance of Investment Forecasting

Forecasting is our Unique Strength

Past performance is no guarantee of future performance. “All investments involve risk.” Returns shown are hypothetical in nature. These statements are all true, however they seem to imply that all investment-related forecasts are equal, which is not true.

We believe that good investment advice depends on good forecasting. This is the area where the “Evidence & Equations” part of our Empathy, Evidence & Equations approach shines.

Why You Should Care About Forecasting

When you hire an investment advisor, you are hiring someone to make forecasts: forecasts about how much your investments will grow, how well your investments will withstand market downturns, and whether your investment strategy will support your goals and dreams as the years go by.

Forecasting is a skill that is distinct from knowledge of financial markets, retirement plans, insurance, estate plans, taxes, and other financial subjects. Advisors who have expertise in these areas do not necessarily have expertise in forecasting. Research for decades has found that most people use simple or even primitive forecasting techniques, even when their expertise in the subject matter they’re forecasting is high.*

Forecasting is central to effective investment planning, and we have unique credentials in this area.

*Tetlock, Philip, and Dan Gardner, 2016. Superforecasting: The Art and Science of Prediction, Crown. McConnell, Steve, 2006. Software Estimation: Demystifying the Black Art, Microsoft Press. Todd, P. and I. Benbasat, 2000. “Inducing Compensatory Information Processing Through Decision Aids That Facilitate Effort Reduction: An Experimental Assessment,” Journal of Behavioral Decision Making 13(1): 91-106.

Our Story: A Forecasting Approach to Investing

From Steve McConnell, Advisor/Founder:

I didn’t intend to start an investment planning company. I originally just wanted to do some financial planning for my own purposes.

I had worked on investment planning tools at The Russell Company in the 1990s. These were high-end tools that were licensed to fund managers and advisors for $20,000/year and higher. I assumed that, almost 30 years later, similar tools would be available to individual investors. I was surprised to find that they weren’t. The more I looked, the more I found that even the tools used by advisors didn’t contain the functionality I needed. In addition, the tools had limitations that I thought were severe, such as not accounting for the tax consequences of investment decisions and not considering more than a tiny number of asset classes.

I have a deep background in forecasting, so I decided to build my own tool. I incorporated what I learned at Russell in the 1990s. I also included Nobel prize winning work from Herbert Simon, Harry Markowitz, William Sharpe, Daniel Kahneman, Eugene Fama, Robert Shiller, and lots of additional research.

The result is Rain Dog, a Monte Carlo simulation tool that provides mathematically rigorous insight into complex financial planning questions. Most important, Rain Dog supports analysis and forecasting that is tailored to your specific circumstances.

Questions our investment forecasting can answer

100% reliable answers are rare in investing, but better answers are nonetheless possible, with the right kind of analysis and support. Rain Dog was designed to answer questions like these, based on your specific circumstances.

  • Will my savings last until I’m 85? 95? 105?

  • What standard of living can I expect during retirement?

  • Can I afford a vacation home, and what effect will that have on my annual income?

  • What financial legacy will I leave my children and grandchildren?

  • How much should I save per month or per year?

  • What’s the real effect of working for another year?

  • How will different kinds of investments affect the safety of my income and of my legacy?

  • Should I begin taking Social Security benefits as soon as I am eligible or wait until the benefit amount is higher? How will that interact with my investment strategy?

  • Should I spend taxable assets first, or tax-deferred assets, or tax-free assets?

  • If I do a backdoor Roth conversion and pay taxes on that now, will it pay off over time? Should I do the conversion in 1 year, 2 years, or longer? What if I wait a few years to begin the Roth conversion?

  • What will happen to my investment returns if 25% of my portfolio is in gold, commodities, and REITs? Can we design a good plan if I don’t want any of my portfolio in gold, commodities, or REITs?

  • Should I convert the portfolio my advisor recommends all at once, or over 2 years, 3 years, or longer?

Some advisors will give rule of thumb answers to these questions, but those answers might not apply to your specific situation. Rain Dog provides mathematically-based answers that forecast specific impacts based on your unique circumstances.

Our Forecasting Capability

Our forecasting capability has been proved across multiple disciplines.

Investment analysis tools. Advisor/founder Steve McConnell was the lead on Russell Performance Universes, which was the Russell Company’s best-selling software tool of all time. (This was an analysis tool, not a forecasting tool.)

Covid forecasting. The covid forecasting model that Steve McConnell created was ranked the fourth most accurate US covid forecast model by a paper in the Proceedings of the National Academy of Sciences and the third most accurate according to Royal Society Open Science.

Software estimation/forecasting. Steve McConnell was lead author of SPC Estimate Professional, which was runner-up for software development tool of the year. Steve also wrote Software Estimation: Demystifying the Black Art, Amazon’s technical and Internet book of the year in 2006. He invented the term Cone of Uncertainty, which is now regularly used in weather forecasting.

Investment forecasting. Steve has applied his Cone of Uncertainty concept to investment forecasts. Rain Dog will provide you with Cone of Uncertainty forecasts for your investment growth and income, along with other unique analytics that will help you to fully understand your investment plan and all of its implications.