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US GDP and FIRE Investing
Old 08-22-2010, 03:09 PM   #1
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US GDP and FIRE Investing

I have read a few articles about US GDP being a predictor of the direction on the stock market and how the GDP may signal a double dip recession. I have some questions arising out of this theory.

1. If we are invested for the long term (for me 5+ years) should the quarterly GDP figures have any effect on my investing for early retirement? If we have a double dip recession, do we just stay the course, and keep our monthly investing the same as we have in order to maintain our pre-determined asset allocation (stock/bond/cash mix)?

2. Assuming yes to Number 1, then if I have a set amount that I can invest on a monthly basis, if the GDP numbers turn out "bad" what should be the priority order of my investing between stocks, bonds and cash?

3. Also, if the GDP numbers are considered "bad" (not meeting expectations, or not meeting or exceeding prior quarter numbers) do bonds tend to do better than stocks in that type of environment? Or, does the return on both bonds and stocks go down in a double dip recession environment?

Thank you for your insight.

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Old 08-22-2010, 10:19 PM   #2
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The growth of the GDP is a good indicator of the health of a nation's economy. A healthy, growing economy tends to increase stock prices over the long term. But, lots of other things can affect stock prices over the shorter term, and I'd say quarterly GDP numbers would be of very little use in doing any kind of market timing with regard to your stocks. Pick an asset allocation you are happy with and stick to it.

If stocks take a dive, bonds sometimes go up (as people get scared and sell their stocks and buy bonds, thus driving up their prices). But, sometimes stocks and bonds go down together.

If you pick an asset allocation and then rebalance as stocks and bonds (and maybe REITS and commodities, as well as a few sub-categories of stocks) go up and down in value against each other, you'll tend to sell assets that have gone up and buy assets that have gotten cheaper. That's a good way to reduce volatility in your portfolio overall.
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