Where to invest in this economy

They say that bad news sells, and if that is true, there has been a lot of selling this year as our Australian stock market has sunk into negative territory.

Before slumping in October, the market had been trading sideways after experiencing two periods of growth of around 8% and two periods where it fell 8% or more.

All of this bad news and recent volatility have seen investors in Australia confused as to how to invest in our stockmarket.

Growth vs income

Do they go for growth, go for income, do both or sit it out until things improve?

We know that good times never last, and neither do bad times. We also know that when things seem uncertain this is the time when fortunes are made.

There is no denying that there has been a lot of talk regarding the state of the Australian economy, with many fearing a recession. According to the ABS, the Australian economy grew by 0.4% in the June quarter of 2023 and 3.4% from 2022 to 2023.

Now, I don't know about you, but these figures do not inspire confidence in where our economy is and where the stockmarket might be heading.

War and the stockmarket

The good news is that these numbers hardly spell a recession, and to be fair, Australia's economy through COVID and up until now has been quite resilient. However, this doesn't mean we're out of the woodwork, especially with wars escalating in parts of the world.

Here is something you might not know: wars are generally good for the stockmarket, not necessarily while they are going on, but definitely after.

To understand how we might invest and plan for the future, we first need to understand what contributes to Australia's economic growth, as investors can't buy yesterday's returns. So, knowing where the economy is and what drives it helps determine where it will go.

The main factors that contribute to Australia's GDP and for the economy to grow we need production, income and expenditure to increase with the cost of goods and services increasing as well as income.

We also need household expenditure to increase, but that's unlikely to happen soon with the high cost of living and high-interest environment.

While I don't believe Australia will fall into a recession, we are close to it.

Given this, I don't expect our economy to show outstanding performance next year, so this begs the question, how should we invest in a slow growth environment?

The long-term view

One of the biggest mistakes I see investors make in any economic market is that they have a short-term view.

Given that times are a little more challenging right now, it's essential to take a long-term approach to investing.

You need to be consistent in your approach as financial markets move in cycles, and what may seem like a dire situation now will not last forever and could even spell opportunity.

The second issue is investors often take a short-term or micro view of the market based on news that happened today or this week. All that does is make you more emotional and reactive to market conditions.

It is far better to have a macro view and look at the bigger picture because the old investing adage that the trend is your friend means you need to look at the more significant trends rather than the daily trends.

Think internationally

Given this, I recommend investors keep an eye out on what's happening worldwide, as our markets are closely correlated to external trade.

Any hiccup with our major global partners may directly impact our economy. In other words, you are looking for signposts about what may unfold in the economy or the stockmarket.

This helps to take the emotion out of investing, and when you combine this with solid trading rules and strategies, it can guide you in making better investment decisions. These principles are timeless and apply to any growth or decline if you choose to apply them.

These principles also support you in investing to win rather than to 'not lose'. This mentality is highlighted by the fact that investors tend to change asset classes at the wrong time to avoid losing, but in the end, they get more of what they don't want.

As with anything, the key to being successful is to gain an education, as this will ensure you profit more and risk less no matter what the economy or market conditions.

Savvy investors use three main types of investment to build wealth: shares, property, and business ownership.

Whether you choose one or all three, it's essential that you learn how to invest in each asset to ensure you are successful over various timeframes and in different market conditions. Let me explain.

Shares

This asset is often misunderstood, which explains why many tend to shy away from investing.

However, it is often the best investment area when times are tough. In difficult times, though, it is suggested to look for companies that can stand the test of time rather than the next fad stock. In a slow economic growth environment, we still have basic needs such as Health, Food, Utilities and Telecommunications.

Therefore, you need to look for companies in those sectors that offer value, growth, and stability.

That said, shares can be tricky as their price does not always reflect the underlying company's fundamental value. Learning to read stock charts and the rules around analysing a stock will exponentially increase your chances of success in this area.

Property

One of our core basic needs is shelter, and having a place to live will always be a necessity in any economic environment. The great thing about investing in property is that if the capital value of the property goes down, you still receive the income from the rent.

Property is a low volatile and long-term investment, which makes it a versatile asset to hold over periods of uncertainty, especially if you can use excess equity in the property while the economy is down to buy an additional property.

A good place to start is to look for properties in areas that are gentrifying, have employment opportunities and are close to essential amenities.

You may also like to dig deeper and look for areas with specific demographics, such as age and income. This is important given that during slow economic growth, low-income workers suffer the most and may struggle to cover basic living expenses.

Owning a business

Starting a business or purchasing an existing business can be a difficult choice if the economy is slowing down.

Still, many successful businesses were established during challenging periods and even recessions. As they say, necessity is the mother of invention, and nothing makes people more inventive than the prospect of not having a regular income.

The benefits of direct business ownership are that you can pivot and adapt as different situations arise. If your direct costs go up, you can pass on those costs.

If times are tough, you have the ability to create new products or services that reflect the current opportunities in the market.

Whichever path you choose, I believe that by applying the key concepts discussed above, you will be a far more successful investor and be able to weather any financial storm.

Now is the time to learn and do more, not when the economy is booming, as it is too late, then as you have missed the boat.

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