Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Tip of the week: “Focus your investing strategy on quality and diversification—not economic forecasts.”

Economic forecasts attract way more investor attention than they deserve, in view of the meagre advantage, if any, that they add to your investing strategy. In fact, most experienced, successful investors feel skeptical, if not downright cynical, about economic forecasts, for three reasons.

1. Accurate economic forecasts are rare — certainly rarer than profitable stock-market recommendations. There are simply too many economic factors interacting in too many ways. That’s why nobody guesses right every time, and even the best economists can be right on in one year and dead wrong the next.

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2. Fame as an economist has little to do with forecasting skill. After oil prices got up above $75 a barrel in late 2007, many prominent Canadian and U.S. economists predicted that fast growth in India, China and other emerging economies practically guaranteed that oil prices would keep rising indefinitely. Common predictions had oil rising to $100 if not $200 a barrel and beyond.
   
   Instead of shooting up to $200, the price of oil plunged to less than $50 by the end of the year. It has since risen to around the $85 mark. It may return to its previous highs. As oil alarmists like to say, maybe they weren’t “wrong, just early.” However, if you let the supposed inevitability of $200 oil influence your investing strategy, you lost a lot more than the average investor.
3. Even when an economic forecast is right, it may not help your investing strategy. That’s because the stock market anticipates economic trends much better than any economist, and moves up and down ahead of them.

Our investment advice: Peter Lynch, one of history’s all-time top mutual-fund managers, summed it up best when he said that, “If you spend 12 minutes a year worrying about economics, you’ve wasted 10 minutes.” Economic statistics and reports can provide clues to investment risk and opportunity, and predictions and forecasts may make interesting reading. But the quality and diversification of your investments are the keys to your long-term investment results.

Next Wednesday, February 23, 2011, Investor Toolkit will give you our investment advice on the right number of stocks to hold in your portfolio.

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