Stock market predictions are often incorrect, so it is best to instead focus on building a sound long-term portfolio using our Successful Investor philosophy

Stock market predictions are terrible at determining what effect changes will have on an industry and its stock prices. It’s even harder to predict how long those changes will actually take to appear. Of course, adverse changes are hardest on companies with bad financing, poor products, weak management or other drawbacks. Meanwhile, successful companies figure out ways to adapt and even profit from change.

When listening to stock predictions, especially gloomy ones, keep in mind that nobody can consistently predict the future. Also remember that the most widely accepted predictions are especially prone to failure. That’s because people, as individuals, react proactively to predictions of doom. They work on the problem before its predicted arrival time. Sometimes they offset it entirely.

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Learn why stock market predictions and “a good time to buy” are opinions, and how listening to them can limit your success

Mind you, “a good time to buy” is an opinion on a long-term probability. It doesn’t mean the market will go up right away. For that matter, you may buy just prior to one of the market’s occasional downturns. Successful Investors have to accept this risk if they want to profit from the stock market’s ability to turn, for instance, middle-income people into well-off retirees over the course of a few decades.

The funny thing is that many people hurt their prospects by going at it backwards. Instead of looking for good times to buy, which are relatively plentiful, they fixate on avoiding the market’s relatively rare downturns. They try to do that by hunting for reasons to stay out of the market.

They want to invest in stocks in principle. They believe in the market’s long-term growth potential. But they dread the thought of buying just prior to a downturn. So, if they see anything that they fear might provoke a market setback, they hold off on buying until the risk has passed.

Relying on stock market predictions can tempt you to take on too much risk

When it comes to predicting the market’s direction, no investor “gets it right every time,” as the saying goes. Any such investor would eventually acquire a sizable portion of all the money in the world. Nobody ever succeeds in that.

Of course, many successful investors do hold a variety of strong opinions that are definitely worth listening to. However, these investors are successful because they recognize the fallibility of their opinions. They know some of their opinions are bound to turn out wrong.

Stock market predictions can lead you to anticipate market setbacks that may not come

Investors often ask about our predictions for the next market correction. Market setbacks will come along unpredictably, as always. The trouble is that corrections—temporary setbacks in stock prices—don’t follow any predictable schedule or cycle. Depending on what you look at, you can almost always make a case that we’re due for one. More often than not, you’ll be wrong. There are too many different factors that can touch off a correction, or stop one from happening.

When a market correction comes, it’s likely to be particularly hard on low-quality or speculative investments. That’s because during those times many well-established stocks become downright cheap in relation to their earnings and the dividends, compared to bonds and other fixed return investments. In contrast, many speculative stocks may appear expensive at current prices, in view of the financial performance you can reasonably expect for them.

In a stock market correction, investors tend to sell low-quality stuff and move their money into higher-quality investments. Either way, it is always a good time to reduce or eliminate your most speculative exposure. We don’t advise you to sell anything out of a portfolio of well-established companies because we believe a balanced portfolio of high-quality stocks will produce above-average gains over time.

Downplay stock market predictions and focus instead on building a sound portfolio. Here’s how:

No matter what kind of stocks you invest in, you should take care to spread your money out across most if not all of the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.

By diversifying across these sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion. You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Our three-part Successful Investor strategy:

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

How often do predictions dictate your selling or buying decisions?

What is your opinion of stock market predictions? Do you think there is any validity in them?