Making decisions is easier when you have all the information you need. That’s why people check the weather before getting dressed or packing for a trip.
You want to know what will happen next so you can be prepared. This human need for certainty and control makes predictions so popular in personal lives and in investing.
For stock market investors, there’s no shortage of predictions on what to buy or sell and when to do so. In this article, we’ll explore the reasons forecasts might fail and why it’s best to have a healthy dose of skepticism about them.
You can’t avoid uncertainty
Many experts and seasoned investors regularly issue forecasts on market performance and the overall economy. Governments, companies, and individuals check these forecasts to make informed decisions and plans.
The basis of forecasts may vary in terms of sophistication. Some are based on data while others may draw conclusions from personal experiences or anecdotal evidence.
No matter the basis or method, these predictions may fall short at times. For example, governments may over- or underestimate changes in inflation rates or a country’s economic growth.
In response, analysts may update their projections periodically. This means earlier stock predictions based on previous forecasts may become outdated and unreliable.
Additionally, there are disasters and unpredictable events that can disrupt forecasts and stock price movements. They can shake up even the most stable companies or industries.
Humans can be unpredictable
To anticipate the demand for stocks, you’ll need to know how investors may react to news and developments. This requires a good understanding of human behavior, which can be impossible to predict at times.
Bias and human error are some things to consider. People are naturally drawn to patterns and so investors may try to see them where they don’t exist.
A trend in stock prices may appear once or twice, leading people to expect the same pattern in the future. However, this event might turn out to be a mere coincidence. What happened in the past is not always guaranteed to happen again.
Investors and analysts bring their own biases, perspectives, and experiences into their predictions. This can affect their ability to make clear and impartial judgments that align with market realities.
Weathering the unpredictability
Predictions help people cope with uncertainty. Getting reassurance is especially important when you’re investing in assets that tend to be more volatile than others, such as stocks.
However, to be better prepared as an investor, you’ll need to accept certain degrees of risk and unpredictability. It’s ideal to invest within your risk tolerance and plan around uncertainties instead of relying on predictions to bring positive results.
It might be best to treat forecasts as general indications of how things might go. Then, you can think of ways to manage risks in case things don’t go the way you hoped.
This typically involves diversifying your portfolio and looking into different assets in which you can allocate your money wisely.
After all, even if it’s sunny out, you’d still bring an umbrella just in case it rains.
