Michael Callahan
A sound investment strategy should be flexible because the economy is constantly in flux. Economic trends can negatively impact the value of an investment that seemed like a safe choice a few years ago or send the value of a risky investment skyrocketing against the odds. Investors should try not to be rigid when it comes to their portfolios. Maintaining balance and protecting yourself against risk might require you to rework your investment strategy often in response to shifting economic trends and conditions.
HOW DO ECONOMIC TRENDS AFFECT INVESTMENT OPPORTUNITIES?
First, a caveat: there are no hard and fast rules about economic trends and how they affect individual investors or specific types of investments. I'm providing a broad overview of some ways that common economic trends typically affect the value, availability and riskiness of various investment opportunities. Always consult your investment advisors for guidance on protecting assets and minimizing risk in the current economy.
INFLATION AND INVESTING
Inflation has a strong and direct influence on investments in many ways. First, there's the fact that high inflation erodes your profits. The higher the inflation rate, the less real value your dollars have. If you have an investment earning a 3 percent return, but the current inflation rate is 3.5 or 4 percent, you're losing money. And, as inflation drives up the prices of goods and services, investors may have less money to invest.
There is some good news, though. Periods of high inflation can affect the markets in ways that create potentially lucrative new investment opportunities. Certain sectors, such as energy, tend to prosper when prices rise, so investing in those sectors can be rewarding. Inflation may also motivate individuals to explore opportunities to invest in real assets like property, natural resources and precious metals. These asset classes tend to hold their value amid periods of rising inflation.
RECESSIONS, ECONOMIC GROWTH AND INVESTING
Periods of decline may be a regular part of the economic cycle, but the fact that recessions are normal doesn't make them any easier for investors to weather. Certain securities, like bonds and consumer staple stocks (like health care and food manufacturers), tend to yield higher returns during recessions than cyclical stocks that are more affected by economic trends; those are generally riskier places to invest during a recession. Falling interest rates can make recessionary periods an attractive time to buy U.S. Treasury bonds or potentially even investment real estate.
As the economy rebounds from a recession, employment and wages grow, and profits rise. The stock market historically yields strong returns during periods of economic growth. Investors may shift away from bonds and toward stocks in industrial, communication and tech sectors (among others).
NEW TECHNOLOGIES AND INVESTING
Emerging technologies are often described as "industry disruptors." They are also stock market disruptors. Economic trends driven by tech advancements may open up highly profitable new investment opportunities. They can also send the value of your portfolio plummeting if you've been heavily invested in tech that's now outdated or if you take a risk on a new technology stock that fails. The tumultuous history of cryptocurrency illustrates how hit-or-miss it can be to invest in emerging technologies. Some Bitcoin investors earned millions, while others lost everything in the cryptocurrency crash.
Renewable energy, biotech advancements, and artificial intelligence are among the top economic trends that are currently creating new investment opportunities. They're also places where many investors are focused, looking for significant returns. It can be challenging for individuals to figure out which buzzy new biotech startup or AI company to invest in when these companies are relatively untested and operating in very competitive landscapes. An investment advisor can be a great resource when assessing investment opportunities in emerging sectors. Speak to them before acting on any new investment trends you're curious about.
LET’S NAVIGATE ECONOMIC TRENDS TOGETHER
Sachetta's investment management team monitors economic trends to analyze how current and future economic conditions will affect our clients' investments. We use historical data, current market data and sophisticated financial models to help clients make informed decisions that support their individual investment goals.
If you're concerned about current economic trends and their impact on your portfolio or have any questions about good investment management, we're here to help! Contact us today.
Michael J Callahan, CPA, CFP®, MST, and CEO is a Certified Financial Planner™ practitioner, Certified Public Accountant, and holds a Master’s Degree in Taxation from Bentley University. Mike has been involved in personal financial planning, as well as both business and individual taxation for more than 20 years.