Federal Reserve Chair Janet Yellen judged last month that stock prices are "quite high," but given the weak track record of Fed officials when it comes to foreseeing market moves, don't expect stocks to drop, says Eric Nelson Servo Wealth Management
For example, former Fed Chairman Alan Greenspan said in December 1996 that the stock market may have been suffering from "irrational exuberance," Nelson notes in a commentary. But stocks kept rising for another three-plus years.
"The fact is, stocks go up and down, but our ability to forecast market movements with any sort of short-term accuracy is terrible," Nelson writes.
"Even when really smart or well-informed investors or politicians have a point-of-view, it is no more likely to be correct than anyone else's — which is to say completely random."
So instead of basing your investment decisions on market forecasts, "you are better off building a diversified portfolio that matches your long-term goals that you can stick with through the ups and downs," Nelson recommends.
Meanwhile, legendary fund manager Peter Lynch has received great acclaim over the years for recommending that investors who enjoy using certain products and see others enjoying those products should consider buying the stocks of the companies that make them.
"The idea is folksy and simple: keep your eyes open as a consumer, then invest in the companies that you see doing lots of business," writes MarketWatch columnist Jeff Reeves
"But with due respect to Peter Lynch, this strategy of buy what you know is harmful. It's not a bad sentiment and perhaps useful as a starting point, but buying a stock because you use its product? That's the worst idea ever."
The problem: "it's naive to assume that simply because a company makes money selling hot dogs, and because it's selling lots of hot dogs right now, that it's a great investment," Reeves says.
In fairness to Lynch, he did indeed stress that the idea serves only as a starting point. You should thoroughly research a company's finances and make certain it's on a solid path to profitable growth before buying.
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