Tips for Predicting Stock Market Returns
All investors attempt to predict stock market returns when they make an investment; it’s an inherent piece of the investment puzzle because accurate predictions of returns allow you to make the best choices in your investments. Although there is no way to predict returns 100 percent accurately, there are good tips and tools that can help to minimize risk and move you toward your investment goals.
Look Long Term
One of the most common and easily observed features of the stock market is that it essentially cannot be predicted. No one to date has beaten the market every time. However, one of the best ways to predict the returns of any given stock is to study its past performance. Past trends can give you a good indicator of which way a stock is going to go, how quickly and with how much turbulence. The longer the term you study for trends, the more likely you are to accurately predict future performance. Short-term analysis can be dangerous and misleading, generating unfounded hopes or worries.
Be Aware of Outside Factors
The stock market operates purely on the forces of supply and demand. When there is a limited amount of stock that everyone wants to buy, the price goes up. The inverse is also true. However, there are a lot of other factors to be aware of in the political, economic and social realms. For example, even the most consistently performing blue chip stock could be rattled by events such as wars, natural disasters or the advent of a new competitive industry. The political climate and the psychology of investors are important factors to consider, as they can sharply affect the market even in spite of the company's fundamentals.
Use Standard Deviation
It's a given that the stock market is impossible to predict with total accuracy. Yet investors still strive to make accurate predictions based on piles of data and research and a variety of market theories. One of the best tools you can use is standard deviation, which is a way of measuring the amount of fluctuation that you can expect from a certain stock or the market as a whole. Standard deviation indicates how far a stock's actual performance strays from the trend line, or the average of its performance. If nothing else, standard deviation can give you an idea of the dips and spikes that are within the normal performance range of any stock.
Dividends and Fees
Dividends and fees are factors that many investors fail to take into consideration when trying to predict the returns on a certain stock. Some companies pay out dividends to stock holders as rewards for investing. These come from profits, so a company with explosive profits and a generous dividend policy would most likely give a higher return than you might expect from simply analyzing stock growth. On the other hand, there are certain expenses that might cut into stock market returns. These include broker fees of all kinds and capital gains taxes, which apply once you sell your stock for a profit.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."