Goldman Vs. Morgan: Who to Believe?

Morgan Stanley and Goldman Sachs -- two of the most respected firms on Wall Street -- are in complete disagreement on the forecast for interest rates. What does that mean for your investment decisions?

With the 10-year Treasury currently yielding about 3.9 percent, Morgan Stanley is forecasting the 10-year yield to rise to 5.5 percent this year. On the other hand, Goldman Sachs says the yield will fall all the way back to 3.25 percent. If you believed the forecasts had value, the investment strategy you would adapt would be entirely different depending on which forecast you believed.

You could look at each firm's track record to make your decision. Unfortunately, that won't help much. Morgan Stanley was the top economic and rate forecaster in 2009, while Goldman held the title in 2008.

Morgan Stanley believes the huge supply of Treasury debt hitting the market will cause rates to rise. It also believes the economy, private credit demand and inflation expectations will rebound more quickly than many analysts expect. On the other hand, Goldman believes government borrowing is just replacing missing private credit demand and expects the recovery to be weak, keeping both the demand for funds and inflation down. How do you know which one to believe?

One problem in deciding between the two forecasts is that your own predispositions may factor into your decision (which is known as confirmation bias). Thus, if you're already worried about the budget deficits and the increased supply of debt, you'd probably pick Morgan Stanley's forecast. If you were more concerned about the deflationary pressures of continued high unemployment, you'd likely act on Goldman's forecast.

However, the historical evidence has shown that you're better served by ignoring forecasters. Otherwise, you may be tempted to time the bond market, which is also something the historical evidence has shown to be a loser's game.

The bottom line is you should remember that there are no experts when it comes to the future. Thus, the winning strategy is to ignore them. When you hear (or read) forecasts, they'll come from smart people, each presenting compelling evidence and logic to support their forecasts. That will tempt you to act on the information. But, that's the losing strategy.

Instead of trying to manage returns, you're best served by focusing on what you can control -- the amount and types of risk you take (or your asset allocation), costs and tax efficiency. The best way to do that is to build a globally diversified portfolio that uses passively managed funds that focus on these issues.