Deciphering news about what may or may not be an economic bubble can help stop you from making rash investment decisions.

Investors can find lots of things to worry about today, in politics, economics, terrorism, military developments and so on. However, today’s biggest single worry for most investors is a downturn in the stock market.

Many market downturns can be attributed to the end of economic bubbles. For example the roots of the last recession, the 2007-2009 housing bubble, go back to the 1960s, when academia and the national press in the U.S. first uncovered a banking practice known as “redlining.”

A classic case of unintended side-effects

Back then, U.S. banks accepted (and paid low interest rates on) deposits from all their customers. However, banks “red-lined” some areas—drew a red line around them on a map—and refused to lend to area residents, regardless of individual credit records. The U.S. began fighting this kind of discrimination in the 1960s. It also took steps to make mortgage credit more freely available to a wider segment of the public.

Meanwhile, academic research turned up evidence that homeowners were healthier, more industrious, more law-abiding and so on, compared to renters. Various U.S. government agencies proposed programs that aimed to increase the homeownership rate. Politicians saw this as a great way to fight poverty, and increase their chances of re-election and so this economic bubble began.

The financial industry saw all this as a great new source of fee income. The industry lobbied for more government financial assistance for homebuyers. It came up with new ways to channel bank deposits and investment funds into the home mortgage market. It later found that converting bundles of mortgages into a variety of retail investments for resale provided an even richer source of income, because it could trade in those investments and earn a series of fees.

The promotion of homeownership started out with the best of intentions. However, it set off a 40-year economic bubble in the U.S. residential real estate business. The bubble ended with the 2007-2009 recession, and it brought vast economic dislocations to those it aimed to help. It’s a classic case of unintended side-effects on a massive scale.

Be skeptical of indicators

You need to avoid putting too much faith in the stock market as an economic forecaster. Sometimes the market gives advance warning about coming recessions and economic bubbles. Other times, it predicts economic bubbles that never come. (This, by the way, is true of any economic forecast.)

Up to a point, national and world economies are self-correcting. They rise and fall in a series of spurts and setbacks. The setbacks always show some sign of turning into recessions. They rattle investors and upset the market. But few ever lead to serious, lasting damage.

The 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.

1. Fame as an economist has little to do with forecasting skill. After oil prices got up above $145 a barrel three years ago, 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 $200 a barrel and beyond. Instead of shooting up to $200, the price of oil plunged to less than $50 soon after. It then rose—but since then has fallen to today’s level. 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 serve as your guide to investing, you lost a lot more than the average investor.

1. Even when an economic forecast is right, it still may not offer helpful investing advice. 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. That doesn’t make them sound pieces of investing advice. The quality and diversification of your investments are the keys to your long-term investment results.