As an investor, you probably want to identify the right time to invest. Unfortunately, timing the market is impossible. Even though there isn’t a right time to invest, procrastinating can mean that you are missing out on gains or are avoiding big losses. Historically, the market always trends upward. Therefore, your investments have a better chance of earning you money.
To invest successfully, don’t pay much attention to “hot stocks” and predictions about the market trend. It is because it is guesswork. Instead, invest consistently, especially when you receive your paycheck. Your primary focus should be long term.
Five Ways the Economy Affects Investment Decisions
You should invest any time as long as you are patient. Before investing, you need to make business and investment decisions based on the above tips. Unfortunately, making investment decisions can be challenging. Here are five ways the economy affects business and investment decisions.
1. Government Policies
Government policies can affect the financial marketplace. The U.S Federal Reserve can speed up or slow down growth within the country by decreasing or increasing interest rates. On the other hand, the government can increase its expenditure to stabilize prices and reduce unemployment.
By controlling interest rates and the amount of money available in the open market, the government determines how much investment can flow in or out of the country. Government incentives and the day trading tax rate can encourage individuals to invest.
2. Diverse Portfolio
Portfolio diversification can affect your investment decisions. There are several economic sectors where you can invest. If possible, invest in most of them, if not all. The sector you choose will depend on your ability to take risks and objectives. It is advisable to balance both conservative and aggressive investments in your portfolio. Depending on how diverse your portfolio is, you will become less aggressive when prices skyrocket and less conservative when prices start to fall.
3. Supply and Demand
Supply and demand can affect financial markets. A change in supply and demand of services, currencies, and products can cause a change in rates and prices. For instance, when the demand for oil increases and its supply reduces, participants will outbid them from acquiring the commodity. Furthermore, buyers will be willing to pay more.
Financial markets work the same way. When sellers flood the market, they increase the supply of stock, which pushes the prices lower. Therefore, when making an investment decision, ensure that you consider the supply and demand of commodities or currencies.
4. Inflation
Inflation can affect your business and investment decisions. It can create uncertainty over the future cost of the investment. It can also lead to future downturns. When investing, ensure that the inflation rate is low and stable.
5. Economic Growth
When investing, ensure that you meet future demand. If the demand is falling, you can invest another time. According to the accelerator theory, your investment will largely depend on economic growth.
Here is how to know the time is right to invest:
When You Have Paid Off Debts
Before deciding to invest, ensure that you first pay off your debts. If you have a debt that attracts an interest rate of 5% or more, the chances are that it will cost you more than you would earn when you invest. When you pay off your debts, you regain control of your money. Moreover, it doesn’t affect your credit score.
After Building an Emergency Fund
An emergency fund helps you when you have an emergency but have already invested most of your money. Before investing, you should set aside a percentage of your income for several months. If you have no mortgages or dependents, you should save for at least three months. If you have a salaried job and have dependents, you should save more.
After Tracking Your Finances
Investment shouldn’t be a burden. Before investing, ensure that you track your finances. You need to know how much you are earning and how much you are spending. Ensure that you cover all your expenses before investing. If you can’t find extra money to invest, you should consider increasing your income or reducing your expenses.
From the above information, it is evident that timing has no impact on investments. However, time is everything. The longer you invest, the better the chances of growing your savings.