Smart investors read economic forecasts for fun, not for profit

stock market advice

Too much investor attention tends to be focused on economic forecasts. The fact is, forecasts provide little, if any, advantage when it comes to helpful stock market advice.

Most experienced, successful investors feel skeptical, if not downright cynical, about economic forecasts, for three reasons.

  1. Accurate economic forecasts are rare. They are undoubtedly 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. The fluctuations of oil provide a classic example of predictions missing the mark. After oil prices got up above $145 a barrel six 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 below $50 soon after. It is now back up around $100, about half of the confidently predicted high of a half-dozen years ago. The price of oil may well return to its previous highs. As oil alarmists frequently say, maybe they weren’t “wrong, just early.” However, if you had let the supposed inevitability of $200 oil serve as your guide to investing, you would have lost a lot more than the average investor.

  3. Even when an economic forecast is right, it still may not offer helpful advice. The stock market anticipates economic trends much better than any economist, and moves up and down ahead of developing trends.

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 can certainly be entertaining to read. That doesn’t make them sound pieces of advice. The quality and diversification of your investments are the keys to your long-term investment results.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

What is the one economic prediction you heard that was farthest off the mark? Can you think of one economic prediction that was reasonably accurate? Have you ever invested on the strength of an economic forecast? How did that work out?

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