INVESTMENT IN VARIOUS ECONOMIC CONDITIONS

Before exploring the relationship between investment and the economic environment, we first present the different phases of economic environment.

Economy is never stable; it passes through different phases. These different phases are known as recovery, expansion, decline and recession. Recovery is the phase in business cycle following a recession. The economy takes growth path in recovery. An expansion follows recovery and economic activity rises substantially in this phase. The expansion hits a point known as peak and takes a downturn. Now, the economic activities slow down. This phase is known as decline. The decline phase extends and economic activities slow down further. This phase is known as recession. The economy is in growth path during recovery and expansion and in decline path during decline and recession phases. Between these two paths there is no change in direction. The expansion hits the peak and changes the direction to decline and the recession dips to trough and changes its direction to recovery.

Understanding these phases is important because you need to change your investment strategy. Your turn aggressive during recovery and passive during decline. Similarly, some investment alternatives are attractive at one stage of economy and another alternative is attraction in another. Investors generally invest in common stock during growth phase and in bonds during decline phase. These simple rules are fine. But the most important task for the investors is to predict the change in course of economy, that is, predicting the change in direction from expansion to decline and from recession to recovery. This is a difficult question even to economists and professional investors. Therefore, the question is – when to buy or sell securities is more important than what to buy or sell in investment.