Although many factors affect an investment portfolio, monetary policies are likely the most influential. Nonetheless, many traders do not take account of while composing their portfolios.
In short, monetary policies affect the economy and, in turn, your portfolio's performance. Hence, it is essential to observe what Central Banks are doing and plan accordingly.
Before defining how to trade the present tumultuous economic scenario, we first need to summarise how Central Banks intervene in the economy.
How monetary policies affect your investments
Central Banks' goals consist of growing the economy, encouraging asset allocation, and keeping unemployment low.
These ends are pursued through several tools that, in combination, make their monetary policies.
A 'restrictive' monetary policy aims to cool down an overheated economy, where inflation is growing too high. In such a scenario, Central Banks often intervene by raising short-terms making the borrowing of money less convenient and therefore constricting spending.
In the opposite scenario – an ‘accommodative’ policy – Central Banks try to revive a sluggish economy. Usually, interest rates are reduced while large financial operations amongst banks take place.
A neutral policy occurs whenever the economy is stable. These are ideal conditions yet only temporary.
However, monetary policies are only half of what you have to consider while composing your portfolio. The other half is the expectations about inflation the markets.
Given this premise, how is the current tumultuous situation managed? And how should you compose your portfolio?
The global outlook: How to trade for 2021-2022
The coronavirus outbreak tore the global economy at the seams. To avoid an economic collapse, Central Banks cut interest rates to the lowest and injected an unprecedented amount of money to revive a crippled economy.
Although signs of recovery are finally emerging, Central Banks are wary of changing their accommodative policy.
It is reasonable to expect future monetary policies to match the endeavours of the last year and a half.
From a trader's perspective, though, monetary policies are not necessarily bad or good. What makes the difference is knowing how to respond.
Given the persistent accommodative policy, a trader should look at so-called real assets. That is, assets that absorb the flow of money Central Banks are pushing into the economy.
At LonghornFX we list a comprehensive selection of assets that fall under this definition. On our platform, you will find market-tested Stocks, Indices, Commodities, and many other solid assets.
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