Plan, Don't Predict
Prepare for unpredictable shocks instead of forecasting their arrival
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 97%
Plan, Don't Predict separates preparation from forecasting. The future contains shocks whose timing and magnitude cannot be known, but a portfolio or strategy can still be designed to withstand them. First identify which risks must be hedged and which can be outpaced over time. Then diversify across return sources, currencies, maturities, credit qualities, or other exposures rather than anchoring the plan to one prominent forecast. Use direct hedges when a specific outcome would be intolerable, and preserve growth assets when the objective requires real returns. Finally, define the behavior required during stress so that the plan is not abandoned precisely when uncertainty rises. The output is resilience, not clairvoyance.
Origin
Extracted from Masters in Business during Gerard O'Reilly's discussion of inflation, interest rates, and globally diversified portfolios.
Core principles
- 01Unexpected events cannot be predicted consistently
- 02Unpredictability does not prevent preparation
- 03Diversification reduces dependence on one outcome
- 04Hedges and return-seeking assets solve different problems
- 05A plan only works when maintained through the shock
How to run it
- 1
Define the objective
Specify the future spending, liability, or strategic outcome that must be protected. Express it in real-world terms rather than market benchmarks alone.
Pro tip Separate essential objectives from desirable upside.
Watch out A vague objective makes it impossible to decide which risks require hedging.
- 2
Map unpredictable risks
List shocks that could threaten the objective, such as inflation, changing rates, market closures, or recession. Do not assign false precision to their timing.
Pro tip Include combinations of shocks rather than evaluating each in isolation.
Watch out Recent calm is not evidence that a shock is impossible.
- 3
Choose hedge or outpace
Decide whether each risk requires a direct hedge or can be addressed by assets expected to earn positive real returns over time. Match the method to the severity and horizon of the liability.
Pro tip Use direct hedges for risks whose realization would make the objective unattainable.
Watch out An asset that may outpace a risk over decades is not necessarily a short-term hedge.
- 4
Diversify the plan
Spread exposure across sources that do not move in lockstep. Avoid making the whole outcome dependent on one central-bank rate, market, or forecast.
Pro tip Evaluate diversification by underlying drivers, not by the number of holdings.
Watch out Many securities can still represent one concentrated economic bet.
- 5
Precommit the response
Define what will and will not change when the shock arrives. Establish rebalancing, liquidity, and review rules in advance.
Pro tip Write a short crisis playbook while conditions are calm.
Watch out Improvised reactions during stress often convert temporary volatility into permanent loss.
- 6
Maintain and update
Stick with the plan through expected stress while revisiting it when objectives or structural conditions change. Update deliberately rather than reactively.
Pro tip Schedule periodic reviews separate from market headlines.
Watch out Sticking to a plan does not mean ignoring evidence that its assumptions have changed.
In the wild
An investor distinguishes between outpacing inflation and hedging it. The growth allocation uses diversified equities and bonds expected to earn positive real returns over time, while essential near-term inflation-sensitive spending is protected with Treasury inflation-protected securities or another direct hedge.
→ The portfolio addresses inflation without requiring a forecast of when the next spike will arrive.
A bond portfolio avoids making one prediction about Federal Reserve policy. It diversifies across maturities, credit qualities, and currencies whose interest rates do not move in lockstep.
→ Returns depend on a broad opportunity set rather than one policy-rate call.
Common mistakes
Forecasting the shock
Trying to predict the exact timing of an inherently unexpected event often delays preparation and encourages concentrated bets.
Confusing a hedge with an outpacer
Assets with positive long-term real returns may still lose value during the exact period when protection is needed.
Abandoning the plan under stress
A resilient design cannot help if fear causes the investor to discard it after the shock arrives.
Is it for you?
Best for
It is best for long-horizon investors and organizations exposed to uncertain but consequential future conditions.
Not ideal for
It is not ideal for liabilities requiring an exact short-term payoff unless paired with a direct and reliable hedge.
From the transcript
“Nobody can predict the unexpected, so therefore you can but you can plan for the unexpected, and you can plan to outpace it or to…”
“You can plan for it. You can't predict when you're getting the spike, but you can plan for it.”
“you don't have to be able to predict the unexpected. You just have to be able to plan for it and then stick with that…”
From the episode
Gerard O’Reilly on Academic Research and Stocks