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The economy impacts the performance of your investments in the stock market. 

If the economy is growing or in a recession, it impacts how much money is available and being spent, as well as demand and supply of goods and services, which in turn influences the stock markets performance because the companies that make up the stock market are also driven by supply and demand. 

The performance of these same companies tie into job creation or the lack thereof and influence how comfortable people are with spending money depending on how the economy is doing. It’s all one big circle of life!


How the economy affects your portfolio

Here are some key ways the economy affects your portfolio specifically:

Through Inflation

High inflation reduces the purchasing power of the dollar and can make buying too expensive causing companies to lose sales and their stock value to fall. On the other hand, low inflation means people have more spending power and companies are doing well with sales, causing their stock value to rise. The rise and fall of stocks in relation to inflation, directly affects your portfolio.
 

Through Interest rates

Interest rates are set by the federal reserve and when interest rates increase or decrease the value of stock prices can be affected as well. E.g. When interest rates are increased, stock prices can fall and vice versa.

 

During Bear Markets

In bear markets, the stock prices decline and investors are nervous. This usually goes hand in hand with a flat or declining economy. However, a bear market could also present great opportunities to buy stocks that are undervalued. In other words, a bear market could be described as the stock market on sale as this is usually when people start to panic and sell, sell, sell. Panicking however, is not a good idea especially when you have time on your side and can whether the storm and  you have the right objectives in place.

 

During Bull Markets

In bull markets, the stock prices rise and investors get confident because they are making gains. It’s not a bad time to buy but if you are thinking of selling, you’ll be able to make a good return on your long term investments by selling in a bull market.

 

During Market Bubbles

In market bubbles, stocks are typically overvalued and prices of stocks are much higher than they are worth. The bubble bursts when the values are deemed over priced and prices fall. Bubbles usually occur with “hot” investments when everyone is rushing to buy and inflating the actual value of the investment. For instance, the real estate bubble and the crypto-currency bubble.

Investors that buy “hot” investments at the height of a bubble usually lose the most. Unfortunately the impact of bubbles can trickle into other parts of the market and into other investments, so when it comes to investing, avoid hot stocks and ensure your overall portfolio is well diversified and well balanced.

 

When it comes to the economy's behavior and how it impacts your investments, the key is to stay focused on your big financial picture, be clear on your objectives, understand the risk and make the smartest decision. If you are unsure, hold and ride it out Warren Buffet style :)
 

P.S. If you watch the financial news like CNBC, you might hear reference some or all of these terms - it will all now start to make sense!