A bullion dealer examines a gold bar weighing 1kg. Gold's record-setting rally has made the precious metal a better investment than the shares of gold-mining companies

Many people working in financial services in Ireland are asked to make some sort of a prediction about the future price of stocks, property or other assets. However, this approach – attempting to guess the future – is fundamentally flawed.

Advisers, wealth managers and stockbrokers should not be paid for trying to predict the future, since the future is uncertain and random events can alter markets in unpredictable ways. The antidote to this uncertainty is diversification, not crystal ball-gazing.

To illustrate the enormous difficulty of the task of attempting to guess the best place to invest next year, simply ask yourself this: what was the best place to invest your money last year? It's difficult isn't it? You would probably need to look it up.

One of the best places to invest in 2008 was long-term government bonds, up 17.51% in 2008, but they were one of the worst places to invest in 2006 and 2007, down 8.73% and 6.67% respectively.

Attempting to move in and out of different investments, or market timing, is fraught with difficulty. You need to be correct in your decisions more than once – when to get in, when to get out and when to get back in again.

In a study in the US of 15,000 predictions over 12 years from 237 market newsletters, there was no evidence of any skill in the predictions made. Predictions that were correct were just as likely to be lucky as skilful and distinguishing luck from skill is extremely difficult over short periods.

Identifying investment managers with stock-picking skill is slightly easier – there don't appear to be many. In a study of 2,100 stock-pickers over 32 years, 99.4% of fund managers were shown not to have verifiable stock-picking skill. Those managers who beat the market were fewer than the proverbial large group of monkeys with a dart and a stock sheet. Why do we see so few skilled fund managers beating the market? One reason may be that the monkeys work for bananas.

Finally, in a study of 660 hiring and firing decisions by investment consultants selecting investment fund managers, the fired managers beat the hired managers who replaced them.

A better approach than the conventional wisdom is to consider the role of any investment within a wider, diversified portfolio in relation to how one might expect it to perform, on average, based on a detailed understanding of how it has performed in the past.

Now, we have to be clear on one thing here. We are not suggesting that an investor looks at the last two or three years and attempts to draw any meaningful inferences.

For example, if we look at the performance of the stock market as measured by the MSCI world index over, say, the past three years, the average annual return was about –7.32%. One might conclude, based on this, that an investment in the stock market is a bad investment. However, it takes about 30 or 40 years of data to prove statistically that stocks outperform cash in the long run.

Between January 1971 and the end of September 200 , the average annual return from holding gold was 8.70%, compared to 5.71% for cash as measured by one-month treasury bills.

The stock market as measured by the S&P 500 returned an average annual return of 9.92%. Over the long term, gold has done a good job of preserving wealth

So should one buy gold at around $1,050 per ounce? If one is buying gold for financial insurance or as a hedge against risk, then the price paid today is not so relevant to the decision to purchase, for the same reason that I don't cancel my house insurance just because my premium has increased since last year. I don't buy house insurance because I hope my house catches fire; I buy house insurance in case it does.

Gold is a form of financial insurance within a portfolio. It is a refuge from risk and should therefore be used within a portfolio to reduce exposure to other forms of systemic or market-wide risk, such as banks failing, that affect markets from time to time.

However, because bad news events like 11 September 2001 are so random, the smart way to think about any investment decision is not to think about the price paid today, since the current price reflects all of the opinions of all of the buyers and sellers around the world.

Investors should not be trying to out-guess the market but rather acknowledging that the news will continue to break in the future in random ways which will move future prices of all investments unpredictably. Diversification is the antidote to uncertainty.

Marc Westlake is head of wealth management at Goldcore Ltd, the fee-only wealth management company