Economic predictions are often wrong, but you’re not using them correctly either

The financial news is slating economists, but one Fool blames someone else for poor forecasting… you.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Evolution has resulted in us having a deep-seated hatred of uncertainty. The future is inherently unknowable and that drives many of us crazy, inducing anxiety in all areas of life, not least in investments.

Most of us would agree it’s impossible to predict the future. When was the last time you turned to the local soothsayer and her crystal ball to forecast the oil price, or tried to predict Unilever’s full-year earnings in your tea-cup?

I’d guess (or hope) you’d answer never, yet investors have been known to seek out even weirder sources for investment advice, such as financial horoscope predictions. Yes, that’s a thing.

Fear of the unknown has driven many a sane individual to these odd ‘solutions’ but is it any less crazy to pin our hopes on an economic forecast?

The short answer is yes, it’s far less crazy. The long answer… well, that depends on how you use these predictions.

The butterfly effect

Each year our world grows ever-more connected. Governments lend more and more to each other, products are more and more frequently traded across borders and technology advances sweep multiple nations at once.

Many seemingly small developments can have a domino effect, impacting the economy, which in turn might influence government policy, leading to complicated consequences that can be impossible to foresee.

Some would argue that economists, those few brave enough to tackle the maddening reality we live in and who attempt to wrestle it into some form of rationality, are no better than mystics.

While I don’t bet on predictions, I strongly disagree. Forecasting is incredibly difficult, but it’s a necessary evil. Economists use a scientific approach to calculate potential futures.

Sure, you could argue the profession’s hit rate must improve. You could argue the efficient market hypothesis (EMH) should be dropped (it really, really should). You could argue that Homo Economicus, a foundational principle in some economic models that presumes humans are rational agents, should also go the way of the dodo.

But economists aren’t the only ones who could do with a fresh approach. A lot of investors also need to change how they use forecasts.

Potential futures, not betting tips

Firstly, we must acknowledge there are hundreds of potential futures, although only one can come to pass.

This realisation has only one logical conclusion: we must stop viewing economist forecasts as a tip on which to bet the farm. Instead, we should use these informed opinions to consider how our portfolios might fare in a variety of potential futures.

Indeed, the much-maligned economist might raise possibilities we had never even considered before, helping us avoid potentially disastrous investments.

In sum, I recommend widely reading reports if you have the time, before building a bottom-up, quality portfolio that will likely perform come rain or shine. Economist forecasts might not be the Holy Grail of investing, but to stumble into the future blindly is incredibly risky.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Will NatWest shares beat the FTSE 100 again in 2025? Here’s what the charts say

NatWest shares have left rivals Lloyds and Barclays in the dust in 2024. Stephen Wright looks at whether the stock's…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could the Lloyds share price crash in 2025?

Lloyds is facing a financial scandal potentially landing the bank with a massive customer compensation bill that could send its…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Which UK shares could be takeover targets in 2025?

UK shares have done well this year, but a lot of the big returns have come from companies being acquired.…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Is this the new Shopify? Why I just bought this explosive growth stock

This under-the-radar business is on Zaven Boyrazian’s best-stocks-to-buy-now list because of its explosive potential to deliver Shopify-like returns!

Read more »

Investing Articles

At 17.7%, this energy stock has the highest dividend yield in the FTSE 350

This oil & gas enterprise has promised $500m worth of dividends in 2024 and 2025, pushing its yield to the…

Read more »

Investing Articles

This S&P 500 stock just hit $1 trillion! Which one will be next?

This often-overlooked semiconductor business just surpassed a $1trn market capitalisation as demand for its AI chips explodes to record highs!

Read more »

Investing Articles

Down 70% with a P/E of 3.5! Is this FTSE 250 stock on the verge of a MASSIVE comeback?

Motor finance lenders are getting a second chance in court that could avoid £30bn in penalties. Is this FTSE 250…

Read more »

Investing Articles

This FTSE 100 stock’s down 50% with a forward P/E of just 6.6! Is it a screaming buy for me?

This FTSE 100 homebuilder surged 40% during most of 2024 before crashing, creating what looks like a lucrative buying opportunity.…

Read more »