The health of the economy is directly proportional to your investments. If the economy is doing good, then chances are your investments will also earn good. However, if the economy is experiencing a downturn, then definitely, your investments too are affected.
Since the US has the largest economy in the world, most people watch its economy as it may have a domino effect to smaller economies most especially for countries whose main clients for their export products is the US market. According to Kiyosaki, there are three main economic terms you need to know when investing. You’ll hear these economic terms reported on the nightly news and in your newspaper.
The Index of Leading Economic Indicators. This is the measurement perhaps most widely watched by economists. Issued monthly by the Conference Board, a business research group, the index is based on ten different economic factors, among them the jobless rate, the number of new houses under construction, the M2 money supply, the number of new factory orders for consumer goods, and the prices of certain stocks. The index allows economists to assess the current state of the economy and to predict, for example, when there might be higher inflation, an upswing in productivity, higher unemployment, or a recession.
The Gross Domestic Product. As you’ve learned, this is a total measure of the goods and services produced in any given period, usually a year. The GDP, measured by surveying several thousand different goods and services, is a sort of national balance sheet. It reports on production, distribution, use, and export. The GDP is adjusted for inflation and for seasonal factors such as increased consumer spending.
The Consumer Price Index (CPI). Also known as the cost-of-living index, the CPI looks at the economy from your point of view. Every month the U.S. Bureau of Labor Statistics records the prices of 80,000 different goods and services typically used by Americans. Among the prices tracked are those for housing, food, clothing, transportation, health care, education, and recreation. The most widely used indicator of inflation, the CPI is the basis for calculating increases in such things as Social Security payments.
Kiyosaki left us with two of his Rich Dad Tips on Investing:
Three consecutive rises in the index of leading economic indicators signal that the economy is growing. Three consecutive drops signal a downturn.
Let’s say the economy goes into a nosedive. An economic depression is emotional depression. People lose money and they get depressed. But if you’re armed with financial knowledge, you increase your chances of riding out a depression.
According to Kiyosaki, sophisticated investors make more money in times of bust. They keep their emotions neutral and enter the market when everyone else is fleeing it in panic. The financially intelligent buy when others are selling. Great opportunities are seen not with your eyes, but with your mind.
As an end, here’s another Rich Dad Tip:
There will always be market booms and busts. The trick, in a bust, is to buy instead of sell. Don’t panic, profit!