According to a new CNN poll, 80% of Americans believe the economy is in bad shape. Respondents cited unemployment as the most important economic issue, followed by the deficit (28%), rising gas prices (21%), housing (6%) and taxes (4%).
Should today's economy affect your investment decisions?
A Complicated Animal
The U.S. economy is a complicated web comparable to a very large ship with many moving parts. The engine room and cockpit are two important areas, but other vessel parts like the motor and hull are crucial too. A well-functioning ship should provide a smooth ride and get the passengers to their final destination safely and on time.
Weather plays a key role in determining how a ship will perform during its voyage. For the economy, interest rates, home prices, unemployment, inflation, deflation and taxes impact the velocity of business activity.
The Economy and Stocks
Is a sluggish economy bad for financial markets? It may surprise many people to know that despite mixed economic signals, since the beginning of the year, U.S. stocks (NYSArca: VTI) are ahead by 9.34%, international stocks (NYSEArca: VEU) are up by 8.97% and global real estate stocks (NYSEArca: RWO) are up by 9.77%.
Regardless of whether you believe financial markets have gotten ahead of themselves or not, the figures show that a spotty economy is not necessarily bad. If anything, a tepid economy should cause companies and investors to be more careful with their capital and how it's spent.
Investing During Bad Times
Investing money during a poor economy can produce outstanding long-term results, especially when asset prices go on sale. 'It is impossible to produce superior investment performance if you buy the same assets at the same time as others are buying,' said Sir John Templeton.
As such, you should always be keenly aware of investment opportunities as they arise.
For example, residential real estate prices have fallen roughly 40% over the past few years and they may fall even further. While a full recovery could take a while, capitalizing on depressed prices when others are heading for the exit, could be a smart move. This is the case, not just with real estate, but with any market. Look no further than the precious metals market (NYSEArca: GLTR) which has fallen about 16% over the past week. It could be a buying opportunity in disguise.
For sure, investing in anything that's experienced a sharp drop is a gutsy move, but like most contrarian trades the reward comes to those who exercise discipline and patience.
The Most Important Factor
While the economic climate should most certainly be on your radar, it should not be the main factor affecting your investment decisions. The overriding factor in all of the investments you make should always be you. Your investments should take into account your age, your level of risk tolerance and what you want your money to ultimately accomplish.
Remember: Today's economy may not necessarily be tomorrow's economy. That's why makingimportant financial choices based upon today's economic climate is like the 'tail wagging the dog' whereby something of greater significance is being driven by something of lesser importance.
For individuals making short term investment decisions or strategic trades, economic factors should probably play a greater role in the choices they make. But for everyone else, it's just a lot of noise.