Focusing on a stock market forecast can result in untimely buying and selling, which in turn will most likely lead to lower investment returns

When investors base buy and sell decisions on a short-term stock market forecast, they often experience notably poor investment results, or even lose money. This may come as a shock to them that their predictions didn’t come true. It may have seemed to them that market trends, up or down, are easy to foresee. But in fact, nobody consistently foresees these trends. That’s why most investors hurt their returns if they let short-term stock market forecasts have much of an impact on their investment decisions.

That’s despite the fact that many investors may have guessed right about a coming trend at one time or another. Maybe they bought just prior to a big upswing, or sold in advance of a major slump. In the long run, however, these experiences may wind up costing them money. They may bet twice as heavily on the next trend they foresee, with more volatile stocks, only to discover their forecast was 100% wrong.

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How a lot of buying and selling impacts investors looking at a short-term market forecast

Studies by Dalbar Inc., a U.S.-based research firm, show that if investors do a lot of in-and-out trading, they routinely make only about one-third of the return they could have earned with a simple buy-and-hold approach.

As well, studies of top-performing mutual funds show most of their investors lose money or make negligible returns. That’s because most investors in a top-performing fund only buy into the fund after it has already made big gains. Investors also tend to sell former top-performing funds only after a major slump in the value of their holdings. When you chase investment performance, it’s all too easy to buy at the top and sell at the bottom.

Here’s a Successful Investor saying you should always keep in mind: “If it was easy to predict which way the market will go, why would anybody work?” In fact, it’s hard if not impossible to consistently profit from short-term trading. That’s due to the large random element in short-term market trends.

The stock market forecast and a sector rotation strategy

Some stock market forecasts involve market trends. These trends are dictated by economic and world news, interest rates, trends from industries such as technology or resources, and so on. These trends could be positive or negative, and they could lead to a huge boom for the stock market or they could lead to a big downturn. At the same time, it can lead investors to try and pick the next hot sector.

We at the Successful Investor have long advised against practicing a top-down sector rotation strategy. That’s where investors under-weight or over-weight sectors of the stock market depending on a forecast of the economic cycle or other factors. Few sector rotators succeed over long periods, because they need to guess right twice. They have to pick the top sectors, and they need to pick the stocks to rise within those economic sectors. Consistently succeeding at both is extremely difficult.

For example, if the finance sector was hot and receiving lots of investor attention, investors using a sector rotation strategy might rebalance their portfolios to overweight that sector and hold more finance stocks.

A sector rotation strategy may work in a given year when the economy behaves more or less predictably. However, it is difficult if not impossible to produce consistent longer-term returns with this strategy.

Instead of using a sector rotation strategy, we advise you to follow a core element of our Successful Investor philosophy and diversify your holdings across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities. You will improve your chances of making money over long periods, no matter what happens in the market. The proper proportions of how much you should hold in these sectors depends on your temperament and circumstances.

Regardless of the stock market forecast, avoid selling your blue chip shares too early

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

What kind of stock market forecast would lead you to sell immediately?

Do you use stock market forecasts to make investing decisions? What kind of results have you had?