Seven Pointers for Parsing Predictions

It's amusing to see all the market predictions this time of year in the financial publications and on television. I know investors love this kind of stuff; the mystery of fortune-telling has a special allure. Unfortunately, many investors believe the "fortune" part of it and bet hard-earned money on these predictions, believing they can then sit back as the money rolls in. It almost never works that way.

Use these pointers to keep your feet on the ground as you read heady forecasts for 2007 while we head into the new year.

1. It's OK to read or listen to someone else's thoughts, predictions or analysis on the market or a stock, but you still need to do your own research. Many market pundits and newsletter writers try to predict what the market or stocks will do over the next year or two. They base their predictions on current information, which they feed into an analysis model.

Unfortunately, current information is extremely prone to becoming outdated by unforeseen events. Remember that an effective prediction of 12 months rides on sheer chance and that investing off predictions can be dangerous.

Before you do invest in a stock or other instrument based on these forecasts, make sure the trend and earnings confirm the prediction, because several high-volume distribution or accumulation days can change any trend.

2. Enter the new year with a plan that factors in capital management and risk management. These are the most important components of any trading or investing plan. Many investors and traders fail to understand that the most successful traders always protect and limit their losses and know they must take profits when a stock makes a sustained run.

3. Prepare to be wrong. Even the most-successful traders in the world are right only 50% to 60% of the time. The reason they are so successful is that they quickly cut their losses when they are wrong and stay with only those stocks that continue to outperform the market. If the general market is strong and most of the stocks in your portfolio are underperforming, you aren't in tune with the trends in the market. You either need to step aside or re-evaluate your strategy.

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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.