Investors are facing uncertainty when it comes to monetary policy, changing bond yields, inflation, and more. They’re faced with a new threat: a large U.S. Treasury supply that could boost bond yields and create more pressure on stock prices.
Stock markets around the world were selling heavily earlier this month as fears grew that the Federal Reserve might increase interest rates at a faster pace. The economy is expected to grow even faster in the coming year, and inflation will likely climb to around 2 percent or higher, according to reporting by The Wall Street Journal.
The bull market we’ve been in for a while now is highly tied to the policies from central banks around the world, so it makes sense that federal interest rates are under such scrutiny. Good economic news can easily be seen as bad news, and the opposite is true, too.
As headlines continue to create a negative outlook for bonds due to expectations of higher interest rates, many are left feeling that bonds are toxic and shouldn’t be part of an investment portfolio.
But is that truly the case? The answer is that it depends on the composition of your bond selection.
Bond prices correlate to interest rates with an inverse relationship, but the market has more of an impact when it comes to determining mid-range and long-term rates; the Fed truly only accounts for short-term rates.
More importantly, it’s a good time to consider your portfolio and strategy for the long haul. For example, for those who are loaded up on tech, the recent Facebook scandal involving Cambridge Analytica that caused the social media giant’s shares to drop more than 5 percent might be a concern. That and the possibility of looming trade wars should be enough to reconsider how much risk in one sector is appropriate.
How to Properly Evaluate Risk
For younger people, time is often the most valuable asset they have — and, accordingly, they should be investing more aggressively. That’s why it’s wise to take on more risk in your twenties and thirties: You have more time to ride through rough patches and come out the other side.
For people closer to or already in retirement, optimizing portfolio survival can be more important. Once in a more conservative phase, interest rates and inflation become more important because retirees need stability.
In the current market, here are a few tips to help you weather uncertainty and put yourself in a good place for long-term investment:
1. Ride the Ups and Downs
The market has a lot of different elements at play, which can make it hard (if not impossible) to predict when the ups and downs will hit. This is why a long-term plan can help you stay on track when the market fluctuates, and you won’t have to worry about how every whim of the president or the Fed will affect your investments.
Focus on creating a financial plan that’s based on data, and then stick to the plan. While you might wish a dependable, slow-rising market were always the case, volatility is what provides the biggest opportunities for rebalancing and minimizing taxes. Ups and downs are just part of the rollercoaster ride that is the stock market, so try to make the most of them.
2. Avoid Emotional Decision-Making
Truly reaping reliable benefits from the market means you can’t let yourself get swept away by fear or excitement. Making decisions in these emotional states is how you end up hurting your future gains.
Know what your goals are and where you’re headed. Keeping your focus on your long-term path helps you manage your emotions toward your investments, regardless of whether you tend to be an active investor or a more passive one.
3. Balance Short-Term and Long-Term Risks
If there weren’t short-term risks in the stock market, we wouldn’t be able to create long-term wealth. Putting all your money toward short-term risks in the hopes of earning high rewards typically won’t play out in your favor. However, balancing your short-term investments with long-term ones, from which you can expect steadily accumulated growth, is a much better practice.
Policies will always change at the federal level, and the best thing you can do is keep your investments diversified. It gives you the steadiest footing when it comes to your future nest egg.
While the market and policies may fluctuate, it’s important for investors not to get too skittish about their money. As with any time you’re examining your portfolio, make sure your investments are still appropriate for your long-term goals and healthily diversified. Then, just be patient, ride the wave, and continue to sail toward your future goals.
Craig Birk leads the Personal Capital Advisors Investment Committee, focused on translating improvements in technology into better financial lives. He has been widely quoted in the financial media. Prior to Personal Capital Advisors, he held a senior portfolio management position at Fisher Investments.
The information contained herein is for informational purposes only and does not constitute a complete description of our investment services or performance. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness, or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.