Investment decisions often take financial indicators into account. They are often used alongside financial indices and financial ratings. Financial advice to investors on various markets relies on these financial metrics.
Successful investment requires the assessment of changes in the market and economic environment. Financial indicators can be valuable in this by providing a consistent basis for evaluation. They can be used to identify financial trends. A Certified Financial Planner (CFP) often uses information on financial indicators in order to advise clients on investments.
The choice of a successful investment seldom relies on isolating a single financial indicator, and then making generalisations based on that indicator. Skilful CFPs would continuously review investment portfolios under their management by applying information on financial indicators. They can use a range of indicators to this purpose.
Where to Get Information on Financial indicators
Information on financial indicators and indices can be found in various sources. All the websites of major financial publications carry the latest information, for example:
 Wall Street Journal
 Financial Times (FT) London
 The Economist
StoneHouse Capital releases monthly Market and Economic Reports which contain valuable information on, and interpretations of, various financial indicators.
Leading or Lead Indicators
A period of one to twelve months can be chosen when applying a lead indicator. Although looking into the future is not an exact science, leading indicators are popular because they can be used to forecast booms or downturns in the economy, markets or business environment.
Examples
 New buildings and construction: Changes can either indicate future growth or decline
 Money Supply: The amount of money in circulation can indicate the presence of inflation or deflation
 Business confidence: This measure can indicate whether or not businesses are confident to investment and expand
Coincidental or Coincident Indicators
Analysis of current conditions can make use of coincidental indicators. It is an assessment of the current strength of economic activity. If a coincident indicator increases it means that what it’s aimed at measuring is also strengthening. A decline can indicate that the peak has been reached.
Examples
 General Economic activity: Indicators such as Gross National Product (Gross Domestic Product), Industrial Production, and Capacity Utilisation are reflections of the current levels of economic activity.
 Employment levels: The number of people employed or hours worked indicates current levels of business activity
Lagging or Lag Indicators
Lag indicators contain information on events and patterns that are recorded after the event. They can be used to evaluate the past success of investments. When taken in context with other events and trends they can prove their value by illustrating how similar investments could perform under the same economic conditions.
Examples
 Wages: Wage negotiations are seldom conducted more than once per year
 Interest rates: Central bank interest rates are usually revised on a quarterly basis
 Some of the other lagging indicators include commercial and industrial loans outstanding, average duration of unemployment, change in labour cost per unit of output and others
What lag indicators also have in common is the fact that changes in them are slow.
Advantages of Indicators
Leading indicators identify the possible prospects of investments. A keen understanding of leading indicators can help to shape investment decisions in line with an investment strategy.
Coincident indicators can validate investment decisions. It can provide more objective grounds to evaluate investment decisions. As such, it can take the emotional factor out of deciding whether a decision was good or poor.
Lag indicators can produce information which can be used in historical analysis.
Disadvantages of Indicators
The time factor: If a leading indicator shows the probability of an up or downturn there is no precise way of saying exactly when this will happen. In extreme cases indicators can predict recessions or booms which never arrive.
The human factor: Sometimes a decision from one or more key decision makers can affect markets. An example could be a decision to introduce a new tax.
Conclusion
The use of financial indicators may sometimes be a matter of debate. However, most investors agree that they cannot be ignored. At least some quantitative measures are needed to gauge the future. They can also greatly aid the evaluation of present and past investment performance. The StoneHouse Capital Partners incorporate the use of financial indicators in their advice to assist clients in a most informed way. Thus a balanced perspective on financial indicators can deliver the best results for different clients.
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