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Monday, February 23, 2015

4 must know Investing options during Deflation

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(23/2/2015 StockInvestingTips Economy Conditions tutorials)-Term 'Deflation' in economy is indeed very serious and seen negatively by economists and rightly so. If a economic analyst hears the word deflation, It sends cold shivers down his spine for sure. Deflation means persistent fall in prices
of commodities due to weak demand and declining money supply in circulation in a country. Governments and Central banks of countries often kick in various measures to bring economy out of Deflation. If an economy enters the state of deflation, then following pessimistic things happen in economy:

1)Commodity prices start decreasing wrto previous years
2) Companies become very pessimistic as it is a very tough time to run business in deflation environment, There is no new investments made by companies, Expenses related to Research and Development is immediately halted.
3)Job cuts, Unemployment rises, zero salary hike for employees become too common.
4) Government spending due to unemployment benefit increases and hence Govt debt increases, this has a ripple effect on the economy, Budget commitments of government never meet due to deflation environment.

It is quite obvious that investing money in these though times needs a very different approach then stock investing during bullish times. Since pessimism during time of deflation reaches all time high, It becomes very difficult for a person to choose an investment instrument during these times. Following are some of the stock market investing tips and general money investing tips during deflation times.

1)Don't take any more bank loan: One thing which should be avoided the most in deflation times is taking a new fresh loan from bank. This is because during the time when economy is in deflation state capacity of an individual to repay the debt decreases. There are numerous tensions prevailing in air as fear of job loss, earnings from businesses, declining monthly salaries of individuals. Therefore no new loans should be taken during deflation.

2)Government bonds is best Investing option: If a person wants to invest even when economy is in deflation state, then the best method is to invest in government bonds. Interest rates might be low but government bonds gives better returns then FD dring time of deflation.

3)Consider only blue chips for investing: Putting your money in blue chips is considered relatively safe during the time of deflation in economy. It can indeed turn out to be very advantagous to invest in stocks during tough times as you can do value investing. Fundamentally strong stocks are available at low/value prices. One has to hold on his investment for much longer time if he has invested during deflation. As a state of deflation can take minimum 3-5 years for fully recovering. If a person holds his blue chip investment for 5 years then he can surely make huge gains.

4)Cash is king: One should shrink his spending/investing budget when economy is in deflation, One particular advantage which india enjoys during tough economic times is that percentage of black component mix with legal economy is such high that it is very difficult for indian economy to go in state of deflation. Offcourse, it can go in 0% growth mode but certainly not in deflation mode. Hold on with your cash and let economy get back on a growth track. Keeping cash helps you in increasing purchasing ability. Other type of investments like Real estate shrinks during deflation, whereas holding cash would help you in tough times.

Deflation affects all the economic sectors, Stock markets become bearish, Realty markets decline, job cuts, decreased govt spending, decline in salaries. Since bearish times are best for doing value stock investing and long term stock market investing, One has to take advantage of these bearish times and convert it into opportunity by investing in fundamentally strong stocks.

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