The importance of combining technical and fundamental analyses for smart long investing

By Technical or fundamental analysis: which one is better for long-term investing? Myriad investors use one or the other technique on its own seemingly successfully, but using only one presents significant limitations.      

Using a combination of both could be the ultimate winning strategy. Although the topic of technical analysis is controversial among a certain group of Wall Street investors, recent data points toward its importance when investing for the future. 

A study from March 2023 by Fidelity Investments’ Vice President of Advanced Analytics and Insights Jasleen Kaur and a professor at the School of Business Studies in India Khushdeep Dharni looked at two different strategies of investing using advanced mathematics and computer software to mine the data necessary for more profitable trading. 

Computer algorithms examined both technical indicators and fundamental data across over 381 companies, showing that data-mining techniques incorporating elements of both technical and fundamental analysis led to better investment returns than a pure buy-and-hold strategy. 

Sifting through a huge pile of data seems much easier with the rise of faster technology, but the core principles behind the bots have been around for a long time and could still be used by a qualified person to reach the same results.

Conducting fundamental analysis is crucial when evaluating stocks. One should have a comprehensive understanding of a company’s financial health and performance. The kind of stock to keep for the next 10 or 20 years is the second important component — will the company or commodity exist in the future, or is it a dying business that’ll be outlawed eventually? Fundamental analysis is used in finance to evaluate the intrinsic value or real worth of a security as well as entire sectors and markets.

There’s widespread agreement that assessing investments through fundamental analysis is necessary for long term investing. Although important, on its own it could prove to be limiting. For example, if one evaluates the stock and does not look at the current chart and volume movement, one could buy an overpriced stock right before the price is set to crash.

The second step, which is also of significance, involves conducting technical analysis. Unlike fundamental analysis, which focuses on the intrinsic value of an asset, the technical analysis examines the volume and price of shares over time. If used in isolation, one could buy a stock of a company that is about to go under and lose all the investment. Meanwhile, the data shows that technical analysis is just as important.

While the United States and India have very different markets, markets around the world are similar in terms of behavioral psychology and the research findings are true for investors around the globe in many ways.

Overall, it’s as hard to predict where the market will turn next as it is to predict the future. Whether one is seeking to improve their lifestyle or prepare for retirement, the data is important to consider. Investing is risky. The more confluence one could find pointing toward a similar direction, the better.

It’s important to use both techniques in investing and not to be susceptible to impulse investing or simply trusting someone’s piece of advice. Diligent research is paramount — looking for and evaluating the newest research is crucial.