How To React To Conflicting Market Forecasts

Last Updated Aug 20, 2009 11:44 AM EDT

Today on Moneywatch we're running a series of interviews with some pretty smart finance professionals. I think you'll find their insights on the markets interesting and well reasoned, but they come to different conclusions. So how do you make investment decisions in the face of these conflicting opinions about the markets and the economy?

Two Sides. Well, if you spend enough years studying the financial markets, you'll find that the future of the markets is always subject to a wide range of opinions. Sometimes there are more bulls than bears, or bears than bulls, but that's how the markets work. For every buyer there's a seller, which means someone is always getting in when someone else is getting out.

  • Essentially, we need differences of opinion for the markets to work. This means we need people studying the markets and trying to guess which way they're headed. If nobody studied the markets or tried to guess their direction, then the markets really wouldn't move. So making predictions about the future is part of the game.
When it comes to your personal finances, it's a good idea to stay informed about the markets and to hear a variety of opinions about what might happen. But at the end of the day, you'll discover that no one can consistently predict the future with any reasonable degree of accuracy.

Getting Lucky. Yes, for every cycle there's always someone who predicted the outcome, but every week someone picks the six winning lottery numbers. Until someone can do that 10 times in a row, you're just dealing with luck.

The same is true with trying to predict future market movements. What you'll find is that when the course of the markets doesn't change, most forecasters are correct in their assessments because people simply project out into the near future what we have experienced in the recent past. But when the course changes, few get it right, and that's when it really matters.

And those who do get it right may owe more to luck than skill. But even if they did have a unique insight regarding a particular economic cycle, they're unlikely to have the same insight into the next cycle. But in each cycle, someone always hits it big with a prediction and makes a lot of money, which encourages the next round of speculation into how the future might unfold.

Balance. Once you understand the limitations associated with predicting the future and the randomness of the winners and losers, it should lead you to try to hedge your bets. Thus, I'm an advocate of balanced investing. This means you have some of your money in diversified stocks and some in high quality bonds. You can decide on the specific split, but it tends to be a simple and very effective way to manage money over the long term.

  • When you're balanced, you don't have to predict the future to profit. If the stock market goes on a run, it's usually a win-win situation. Your stocks go up in value, and you get to collect the interest on your bonds and also the dividends on your stocks.
  • If the stock market goes down, it's a partial win. The high quality bonds should help you preserve your portfolio and you still get the interest on your bonds and dividends on your stocks.
Bottom line. Don't get frustrated by the fact that no one seems to agree on the markets. That uncertainty is what drives people to take risks and economies to expand. But, on a personal basis, it's dangerous to bet big one way. So take it all in, but consider a strategy that allows you to both protect and build your wealth no matter who is right.

As with all financial matters, consult your individual financial advisor prior to making any decisions.