The myth
As an investor, you’ll get plenty of advice on which assets to buy or sell and when to make a move. Also, financial analysts and individual investors alike make forecasts and estimates on how the market will perform.
When taken at face value, these predictions seem to simplify your decision-making. They may lead you to believe that there’s a pattern to follow or a formula for success when investing.
The reality
Experts use different methods and tools to possibly predict how financial markets will perform. They tend to make forecasts based on the following:
- Past events
Some investors apply technical analysis, in which they look at historical price trends to find hints on whether prices will go up or down.
There are even popular terms for different observed patterns, such as the January Effect rally or the assumed tendency for stock prices to rise during that month.
Others perform fundamental analysis. This is when investors estimate the value of a stock based on the overall economy, growth potential of the industry, and financial performance of the company.
People may also look at how investors have historically reacted to certain events and expect the same thing to happen again under similar situations.
- Economic indicators
Analysts often rely on economic indicators such as inflation rates, unemployment numbers, and the Gross Domestic Product (GDP) to assess the overall health of the economy and possible effects on market trends.
Government and private agencies issue their own forecasts for these indicators so leaders can make better decisions. You’ll find that these entities can have different predictions and they sometimes fail to give accurate figures.
Though there’s lot of data available to help with forecasting, experts can end up with different conclusions based on the same information.
Bias and personal experiences may play a part in their predictions. There is also a human tendency to misinterpret random events as patterns, which can cloud a person’s judgment.
It’s up to you to verify experts’ claims and decide whether to factor them into your strategy. No matter how accurate they might be, not all investing advice or information will be relevant to you.
It’s best to keep your own goals and preferences in mind before following what others have to say.
Verdict: Partly true
Even for the most experienced investors, there isn't one solid way to accurately predict performance. Forecasting tools help decision-makers with their plans, but they're not fail-proof.
Markets are affected by known and unforeseen factors and so no one can be absolutely sure of what happens next. However, this doesn’t mean that investing decisions should be based on guesswork.
Listening to expert opinions can still be helpful as long as you’ll factor in the risks and do your own research. Once you understand the limits of predictions, the next thing to do is prepare for uncertainty.
You may want to work on choosing investments that contribute to a well-balanced portfolio. There are investing strategies that can help you minimize risks such as proper asset allocation and peso-cost averaging.
