Investing advice: Don’t put too much faith in economic forecasts

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Economic forecasts attract far more investor attention than they deserve, in view of the meagre advantage, if any, they provide in terms of investing advice. That’s especially true today in light of the debt crisis that keeps flaring up in Europe and the uncertainty that lingers in the U.S.

Small wonder, then, that most experienced, successful investors feel skeptical, if not downright cynical, about economic forecasts, for three reasons.

  1. Accurate economic forecasts are rare — certainly rarer than profitable stock-market recommendations. There are simply too many economic factors interacting in too many ways. That’s why nobody guesses right every time, and even the best economists can be right on in one year and dead wrong the next.
  2. Fame as an economist has little to do with forecasting skill. After oil prices got up above $145 a barrel three years ago, many prominent Canadian and U.S. economists predicted that fast growth in India, China and other emerging economies practically guaranteed that oil prices would keep rising indefinitely. Common predictions had oil rising to $200 a barrel and beyond.

    Instead of shooting up to $200, the price of oil plunged to less than $50 soon after. It has since risen to around the $90 mark. It may return to its previous highs. As oil alarmists like to say, maybe they weren’t “wrong, just early.” However, if you let the supposed inevitability of $200 oil influence serve as your guide to investing, you lost a lot more than the average investor.

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  1. Even when an economic forecast is right, it still may not offer helpful investing advice. That’s because the stock market anticipates economic trends much better than any economist, and moves up and down ahead of them.

Our investment advice: Peter Lynch, one of history’s all-time top mutual-fund managers, summed it up best when he said that, “If you spend 12 minutes a year worrying about economics, you’ve wasted 10 minutes.” Economic statistics and reports can provide clues to investment risk and opportunity, and predictions and forecasts may make interesting reading. That doesn’t make it a sound piece of investing advice. The quality and diversification of your investments are the keys to your long-term investment results.

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