Here Are 4 Big Things That Impact Your Investments in the Short Term

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You can’t control many factors in the market and the economy. Here are a few tips for keeping a level head with your investments. 

Investing your money is a wise way to prepare for your financial future. But many factors can impact your investments, both good and bad. For example, if you own stocks, you’ve likely noticed that the S&P 500 stock market index has rocketed about 18% higher over the past year.

Part of that growth has come from investor optimism about artificial intelligence and a surprisingly resilient economy. However, some factors can negatively affect your investments, including inflation and bear markets.

Let’s take a closer look at four big things that impact your investments in the short term and how you can keep a long-term perspective when they come along.

1. Inflation

Inflation is when the value of your money decreases. Over time, money is worth less than it used to be as prices increase. And while this is a regular occurrence in economies, there are times when inflation surges higher over a short period.

Unfortunately, that’s what’s happened in the U.S. over the past few years. The COVID-19 pandemic caused many businesses to shut down and destabilized supply chains. Then, as businesses opened back up, a shortage of workers caused a hiring spree among many companies that helped push wages higher. That wage boost then caused the prices of goods and services to rise. Add to all that an influx of cash from stimulus checks and low interest rates for mortgages and borrowing money, and the economy started running hot.

With a surge of inflation recently, the actual returns in your brokerage account are worth less than they would have been if an inflation spike hadn’t occurred, reducing your buying power.

Additionally, inflation can impact companies that you may be invested in by making it more expensive to hire workers or pay for materials to make their products. This can eat into their profits and impact their share price, which in turn, affects your investment portfolio.

2. Deflation

It would be reasonable to assume that if inflation hurts investments, then deflation — a decline in the price of goods and services — would be a good thing for investments. But it’s a little more complicated than that.

When deflation occurs, the value of cash goes up. This may encourage some people to save their money rather than risk investing it. And when fewer people invest their money in the stock market, asset prices may fall, causing your investments to lose value.

Additionally, when the cost of goods and services declines, it can negatively impact company profits, which can cause stock prices to fall.

3. Bull markets

A bull market is a general term that means that stock prices are up and are expected to continue doing well. A common definition of a bull market is when asset prices have increased by 20% or more from their recent low.

When the market makes significant gains, it’s clearly a good thing for your investments. If investors are generally optimistic about the economy and company growth trajectory, more people will invest in the market and drive asset prices higher.

The one negative aspect of a bull market is that some stocks can become overvalued and might have more potential to fall in the future when a bear market comes along.

4. Bear markets

Bear markets are generally defined as a decline in the stock market of 20% or more over two months.

This is, of course, bad for your investments because the significant decline can erase previous gains your online portfolio has made. In some cases, the decline can be so severe that it erases stock returns that took years to grow.

Bear markets are a normal part of the investing cycle but can be particularly painful if you’re in or nearing retirement. For example, if you entered retirement with $500,000 in stock investments, but then a bear market drove down the market by 20% in just a few months, you may be left with just $400,000 in your portfolio.

This is one of the reasons many people begin to diversify their investments — across stocks, bonds, and cash — as they near retirement. If a bear market occurs and you’re more diversified, you’ll be less impacted than if you have all your money in stocks.

Keep a long-term investment perspective

While you can’t change what happens with the economy or the stock market, you can help yourself by keeping a long-term perspective on investing. This will look different at different stages of your life.

For example, if you’re 30 and a bear market comes along, you likely don’t have anything to worry about. The market will eventually rebound, and the drop likely won’t impact your long-term retirement plans. In that scenario, it’s best not to make rash decisions to sell your stocks. In fact, it could be an excellent time to open your favorite trading app, find undervalued stocks, and buy them.

For retirees or people nearing retirement, a long-term perspective may mean holding onto the money you already have — rather than trying to aggressively increase it. That’s why most financial experts recommend spreading out your investments the closer you get to retirement.

The critical thing to remember, no matter what age you are or how much money you have invested, is to keep a cool head when things get tough.

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