Problems related to the subprime mortgage market and a weak housing market have transformed a slow and growing economy into a challenged economy. Economists are even tossing around the possibility of a recession.

Is a downturn in the economy an indication that it is time for investors to pull back from stocks and stock mutual funds? Should investors look for lower risk alternatives in their portfolios? According to history, the answer is ‘no’.

Short-term Market Predictions

We don’t hold a crystal ball for predicting where the stock market will stand in six months to a year from now and the state of the economy does not make it any easier. Since 1950, there have been nine recessions. The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy lasting more than a few months.” The nation’s Gross Domestic Product (GDP) is the primary measure of economic growth. A recession is traditionally defined as two consecutive quarters of a declining GDP.

Predictive Markets

It is possible for the stock market to gain value at a time when the U.S. economy is struggling since the stock market tends to anticipate events several months in advance. Even if the economy is dragging, investors are looking ahead for indicators that better times are approaching and, thus, they invest accordingly.

Rebounding Economy

Since 1950, stocks have generated significant gains within 12 months following the official end of each recession. Within 12 months after the end of the past nine recessions, the S&P 500 gained an average of almost 13.5 percent. The only recession to not follow suit was that of 2001 – the unprecedented bull market of 1991 to 2000 and the September 11 terrorist attacks. With this recession, stocks declined in the subsequent 12 months following the end of the recession.

Investment Plan

There is no way to predict if the U.S. is headed for a recession, or if current economic struggles will be overcome. It is important to remember that if you have long-term goals, this really shouldn’t matter. It is easy to get caught up in the negative news about the markets and the economy and ponder your portfolio. This is a common mistake made by many investors. Despite potential short-term impacts on the markets, investors should stay focused on their long-term goals.

Valuable concepts to keep in mind are:

* Focus on your long-term investment strategy. If you have developed a plan that makes sense for the long run, don’t let current economic distractions take you off course.

* Remain diversified. Diversified investments perform differently through various market cycles and can help an investor remain strong when any single investment experiences a downturn.

* Continue to invest. Continuing to invest even when the markets are fluctuating in value will help you move closer to achieving your investment goals.

A solid long-term investment strategy may be the best defense against short-term economic challenges. Consider consulting a financial advisor to help you identify your financial strategy and investment options.

Hilary Basile is a writer for MyGuidesUSA.com. At MyGuidesUSA.com (http://www.myguidesusa.com), you will find valuable tips and resources for handling life’s major events. Whether you’re planning a wedding, buying your first home, anxiously awaiting the birth of a child, contending with a divorce, searching for a new job, or planning for your retirement, you’ll find answers to your questions at MyGuidesUSA.com.

Find information on personal finance and investing at http://investing.myguidesusa.com

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