Finance tips: Investing With An Eye to Periodic Economic Downturns

Investing with an eye to periodic economic downturns takes into account economic conditions can change and influence investment performance. Investors may invest with economic downturns in mind to benefit from the downturn, and hedge against the downturn. When an investor allocates assets for volatility protection, it is referred to as 'hedging', so as to avoid risk, and stabilize earnings.

When investing, accounting for economics is generally not approached as though it were an exact science, but rather, as calculated decision making. Such investment decisions may improve one's investment outcomes through familiarity with the investment process, application of investment tools, investment know how, and selection of appropriate investments.

Since economic swings are often temporary, investing for downturns alone is not the same as investing for periodic downturns. A number of strategies can be used when investing with an eye to periodic economic downturns. This article will discuss 1) steps in economic cycle investing, 2) tools involved in cycle investing, and 3) the types of investments used during economic downturns.

Elements of economic cycle investing

Generally speaking, investing involves several factors whether it be for economic cycles, or multiple objectives. Each step in the investment process may incorporate the dynamics created by a nexus of individual financial circumstances that can vary from one person to another. In other words, since investors goals may vary, even when investing with an eye for periodic economic downturns, multiple variables and elements may be considered when preparing an investment plan.

• Investment objective
• Investment style
• Investment types
• Investment techniques
• Investment strategy

The above investment elements can apply to economic cycle and be shaped to fit the individual investor's unique financial situation. Once these elements are elaborated upon and better defined in terms of the investor, then the investment plan begins to take form. For example, an investor may decide his or her investment objective is long-term gains of 10% per year on average for 20 years with medium risk, planning for economic downturns, using a range of financial instruments suited to a volatile market.

Economic cycle investing tools

An important aspect of cycle investing is knowing how to identify an economic cycle in its various stages. For example, the beginning of an economic downturn may start with an increase in selling activity within securities markets in the event of a cyclical cycle downturn, or in the case of seasonal economic cycle, an increase in consumer spending within specific industries. To help with the identification of existing and future economic cycles, the following techniques may be used, but do not necessarily guarantee accuracy.

• Utilize economic indicators
• Research industry developments
• Stay aware of changes to monetary policy
• Monitor legislative developments
• Distinguish market trends and sentiments

Investing with economic variance may also involve retaining financial liquidity, and forecasting price movements of specific financial instruments so as to take advantage of value investing opportunities in the event of an economic downturn. Alternatively, the investor may assume an economic downturn well in advance and apportion money into contrarian investments during an economic upturn when down cycle investments may be of good value.

Moreover, since investing implies a longer-term time horizon, the investor who utilizes this type of strategy may not gain quite as much during a cycle to the upside depending on the type of investments used to hedge the cycle and if the investments are made for the correct type of cycle. In light of this, investing for economic downturns alone may not be refined enough for all types of economic conditions.

Investments used during economic downturns

If an investor is investing for the long-term, cycle investing may not be necessary, but may prevent volatility. Moreover, when investing with an eye to periodic economic downturn, a front-end investment strategy may be all that is used. By front end, one means the investment plan, and financial allocations are designed in such a way to account for economic downturns beforehand and may involve investment in one or more of the following investment vehicles:

• Bonds and bond funds
• Reverse index funds
• Long-term investment assets
• Low correlation emerging markets
• Treasury Inflation Protected Securities

Knowing which financial instrument(s) to invest in when investing with an eye for periodic economic downturns may be assisted with the help of a professional financial planner as several types of investments, tax strategies, risk tolerance, life stage etc. can all come into play. For example, investing for retirement may be different than investing for an estate and early life retirement may utilize different assets management strategies than retirement planning later in life.

Each type of investment carries certain risks, returns, characteristics and costs and the information contained herein is not guaranteed to lead to investment success. Moreover, fees for one fund may be higher than another, collectible investments may be less liquid than financial securities, some bonds may be tax deferred while others may be tax free etc. Thus, knowing one's financial objectives is also important as some assets may not be needed in the short-term in some cases allowing for less liquid investments or alternative investment strategies.