Your investments are heavily influenced by a number of external factors, ranging from interest rates to commodity prices. Before you invest, it’s essential to understand how these factors affect your returns. Read on to learn more about the most important outside factors that can help you determine your investment spend.
When the economy starts to expand rapidly, the Bank of Canada (BOC) often raises interest rates in response to prevent too much borrowing. In contrast, when the economy begins to slow down, the BOC lowers interest rates in order to stimulate borrowing to boost the economy. These changes in interest rates can impact investments quite significantly, especially if companies need to pay more for loans or materials when the rates rise, as this often leads to lower profits. However, some investments will rally when the interest rates spike, such as short-term bonds. It’s important to talk to an advisor who understands the relationship between investments and interest rates to guide you with your financial decisions.
A devastating natural disaster like a hurricane, new government policies, political uprisings, and elections can have a direct impact on the stock and bond market. Even a relatively small incident can have severe consequences for your investment portfolio. That’s why it’s vital that you are well diversified and taking on the appropriate risk level for your age and financial condition.
Taxes also affect your investment portfolio. Without the right tax plan, your returns could take a big hit, which is why it’s important to pay careful attention to the income tax consequences of your investment decisions. Otherwise, you could end up paying high capital gains tax that could have otherwise been avoided.
The State of the Economy
High unemployment and low economic growth can cause people to become more frugal, keeping more money in their own pocket. This eventually creates more stress on the economy and in turn, on your investments. This is yet another reason why it’s important to have a long-term strategy in place that you can stick to through good and bad times.
The prices of commodities such as oil, gold, lumber, and wheat have a tremendous impact on the earnings of public companies and the markets. For example, the price of oil can affect a wide spectrum of companies, from manufacturers to retailers. Companies like Amazon have to ship all their products and therefore, rely on the cost of fuel. If they can’t pass on the price to consumers, then they have to internalize the damage which can hurt the stock prices along with your investment in the company.
As you can see, there are many outside factors that can help determine your investment spend. If you don’t have time to stay informed, it’s best to hire someone who can manage your portfolio for you. Our team of financial advisors are here to help you shape your portfolio to ensure maximum earnings no matter which direction the outside factors move in. Contact us today to get started!