How Does a Slow Economy Affect My Investment Strategy?
Question: How does a slow economy affect my investment strategy?
When you are faced with a slowing economy, you may be wondering what your investing strategy should be. It can be tempting to pull your money out of the stock market completely and you may want to stop putting money in the stock market altogether. However, it is important to continue to invest, and not be scared off by a slower economy, also called a bear market.
In fact, when the economy slows, it's actually a great time to actually buy stocks since they'll likely be at a lower price. It's also a good strategy to take advantage of the lower prices if you can afford to invest.
It's also a good idea to diversify your investments. You do not want to have all of your stock in one company or in one industry. For example, you don't want your portfolio to only represent the tech sector, because if that industry takes a hit, so will you. An easy way to diversify your portfolio is to purchase varied mutual funds that already spread the risk over several different companies.
But back to the economy. When the economy is on a downturn, it's important not to panic and pull your investments, especially if they are at a low. This strategy can cause you to lose a lot of money. Your best bet is to let your money stay where it is, and wait for prices to go back up. Generally speaking, you will likely make money in the stock market over the long term.
But keep in mind that should only be investing if you can afford to lose the money, and can leave that money alone for five, ten, or more years, depending on your investment strategy. Talk to your financial planner to formulate your investment strategy. He or she should be able to recommend good mutual funds or investments that will match your investment timeline and financial goals. In short, it is important to handle your money carefully when the economy is bad.
You may also want to consider diversifying your portfolio to include real estate. Though it requires more cash up-front, investing in real estate can be an excellent investment, and will help you accumulate wealth over time. For example, if you own rental properties it can be a great source of supplemental income in addition to your salary. It could also eventually become your main source of income.
Worth noting: You should try to purchase your rental properties with cash or be sure that you are able to carry the cost of a second mortgage, even if you are not able to rent your place out. It is extremely important to realize the financial responsibility that comes with owning real estate and to plan your finances accordingly.
In a bear market, it is important to really understand your investments. Take time to talk to your financial planner about the types of stocks you are investing in and the risks associated with each. Be prepared to keep your money where it is. And don't panic if your stocks may continue to drop. The stock market is cyclical and most of the time, they will go back up.
While having a general idea of how your investment portfolio is doing, it may not be helpful to check the value every day and obsess over its value. When you invest in the stock market, you need to remember that you have to ride out the tough times in order to come out ahead.
If you find yourself in a slow economy, it can also be a good time to assess your current financial habits and your budget and make adjustments as needed. A slow economy highlights the importance of good financial habits. Think of it this way: A slow economy may end up actually helping you by helping you form better financial habits.
When the economy – and the stock market – begins to trend upward again, be sure to continue to be vigilant about your finances and investment portfolio, and to remember the financial lessons you learned.
Updated by Rachel Morgan Cautero.