As investors and traders, the Global Financial Crisis (GFC) provided us with a timely reminder of what happens when the ‘excesses’ of the financial system are left unchecked by market regulators. Although scores of people lost large sums of money and in some cases their homes, it has also been an incredible time for us to appreciate how the economies and the financial markets of the world are so closely linked.
The global financial system is constantly evolving. Change is happening faster than ever. The major factors that drive change are: new technology, globalisation, changing consumer demands, competition and regulation (or lack of it).
Whilst the average person is unable to stay abreast of the vast amount of changes constantly taking place, it is important that an investor (and to a lesser extent a trader) has at least a basic understanding of the developments taking place in the economy and financial markets.
Over the next few weeks, we will explore the basics of economics, the financial system and financial markets.
Now please, let’s get this straight, I am not an economist, nor would I want to be. But, what I do have is over a quarter of a century worth of market observations. It is these observations and experiences that allowed me to avoid one of the greatest Bear markets in our history.
Businesses, economies and financial markets move in cycles and having an idea where we are in the current cycle can be of enormous benefit to you and the management of your investment portfolio. Many people scoff at the idea of having an understanding of the economy and financial markets. For traders this may be so, but even as a trader, you still want to know when key economic data is due for release.
From an investor’s perspective, I believe it is even more important to have a general understanding of the economy and market. Investors tend to hold stocks for the longer term. This exposes them to the ebbs and flows of the market and economy. If you have just a little knowledge of the economy, you already have an enormous advantage over the average investor.
The ‘big end of town’ has vast amounts of economic data available to them on a daily basis. And whilst the accuracy of economic forecasts can sometimes be questioned, it can not be denied that a large portion of the financial industry uses this data as a starting point for their investment decisions.
That aside, the biggest advantage I believe you gain by having an understanding of the economy, is that you are able to question the general media’s economic and market commentary for yourself.
You can make your own assessment of prevailing and future market and economic conditions. This gives you a massive advantage over not only the average retail investor, but in some cases, also the ‘big end of town’.
The average retail investor will follow along blindly, but you with your knowledge, can think independently of the masses. With a little understanding of the economy and the markets you can quickly adjust your expose or portfolio composition according to your view on the economy.
I hope you find the following series of posts both helpful and informative. Until next time…..wishing you ultimate investment success.
