Sticking To Your Financial Plan When Faced with Negative News
In the present climate, there are many frightening headlines about the markets and the economy as a whole. You may be wondering if you should modify your portfolio in response to this negative news.
While it is important to monitor current events and how they could impact your investments, making rash investment decisions can cost you in the long run. On the other hand, those investors who take the time to understand the headlines – before they react – often make better decisions and can even find opportunities in tumultuous markets.
“Inflation is at a Multidecade High”
One of the biggest economic topics of this year has been inflation. Consumer prices grew at an annualized rate of 8.3% in April, slightly lower than the rate in March, but still near the fastest pace since the early 1980s.
Since the COVID-19 pandemic, prices have increased across the board for the items you buy most — groceries, gas, and energy. Over the past year, food has increased 9.4%, gas has risen 43.6%, and energy services have increased by 13.7%.
In addition to higher prices for consumers, businesses have also seen rapid increases in their costs, with producer prices climbing 11.0% for the 12-month period ending in April. Supply chain difficulties and rising wages have put pressure on businesses. When firms pay more to produce goods, they often pass that cost on to their customers, which can exacerbate inflation.
How Inflation Impacts Your Financial Plan
When prices rise, your dream retirement becomes more expensive. Additionally, your current spending increases, leaving less money for saving. Therefore, you will either need to save more, or earn more on your investments to reach your goals.
With the help of an experienced financial advisor, you can plan for how inflation could impact your saving and investment needs. This includes forecasting your future income needs and positioning your investments to put you on the right path toward financial success.
“Interest Rates are Rising”
In March, the Fed raised rates for the first time since 2018. Then at May’s meeting, they raised rates again, this time by 0.5%. As the Fed funds rate has increased, market interest rates have followed. In fact, mortgage rates reached 5.25% in mid-May, up more than 2% since January.
However, the Fed funds rate impacts more than consumer credit. Rising rates can also translate to higher bond yields. In 2022, the 10-year Treasury has risen from 1.63% on January 3 to 2.86% on May 23.
With inflation still climbing, and unemployment and GDP recovering from pandemic lows, many pundits believe that the Fed will continue to raise rates at upcoming meetings. If rates continue to trend upward, it could lead to higher bond yields and higher costs for credit.
How Higher Rates Impact Your Financial Plan
Higher interest rates can increase the amount you can make on your savings, but in most cases, they cost you more money. This added strain to your budget can come in a variety of ways from higher payments on new loans, rising rates on your variable rate loans, and elevated rates for revolving credit lines like credit cards. These higher payments can take up a larger share of your budget, leaving less of your income for saving.
In addition, rising rates can impact your investments and the economy as a whole. Typically, businesses fund expansionary activities with loans. So, when those loans become more expensive, some companies will be unable or unwilling to bear the cost of expansion.
Additionally, as consumers across the country feel the strain of higher interest rates in their personal finances, they are less likely to take out loans for large purchases. They also have less disposable income to spend on everyday goods and services. In response, businesses could see lower sales and higher expenses which can negatively impact their stock prices.
As previously stated, rising rates can cause bond yields to rise. This can have a positive impact on your portfolio in the long run as your bond investments start to pay more in income. In the short run, however, rising bond yields can push the resale value of existing bonds down. This means that the bonds in your portfolio could be less valuable on the secondary market – should you need to sell them.
For all of these reasons, it is important to work with a financial advisor to review your investments, your budget, and your financial plan. An advisor can work with you to determine how higher rates will impact your spending and saving. Additionally, an experienced advisor can help you forecast how your investments could react to higher rates and make any changes necessary.
“The Yield Curve is Inverted”
The relationship between Treasury securities of different maturities can signal where investors foresee the markets and interest rates heading in the coming months. When the yield curve slopes upward – longer-term securities yielding more than short-term securities – it can signal investors to expect the economy to remain strong and policy to remain accommodative. However, when the yield curve inverts, it can be a signal of lower economic output to come. In some circumstances an inverted yield curve can foreshadow a recession.
Recently, the 2-year Treasury yield surpassed the 10-year and the 5-year yield surpassed the 30-year. The relationship between these yields has continued to invert on several occasions, leading some economists to question whether a recession is on the way.
How An Inverted Yield Curve Impacts Your Financial Plan
An inverted yield curve often precedes a recession, but it doesn’t guarantee one. As such, an inverted yield curve can be an indicator of an impending recession, but by itself it does not cause a recession.
Recessions can mean lower production, higher unemployment, and are sometimes met with lower stock prices. While these periods of economic turmoil can be frightening, they are usually short-lived. Since WWII, recessions have lasted an average of 11.1 months. So, even if a recession does occur, there is no need to panic.
An experienced financial advisor can help you adjust your goals and your portfolio to withstand market downturns if they occur. But often, it is not necessary to change your goals or the way you invest in response to short-term market conditions.
“Stocks are Entering a Bear Market”
A stock market correction occurs when the market drops 10% or more from its most recent high. A bear market occurs when the market drops 20% or more from a recent high.
On May 20, the S&P 500 briefly entered a bear market, as intraday trading brought the index more than 20% below a recent high. As of May 23, the index recovered some ground but has lost 16.63% year-to-date. The Dow Jones Industrial Average [DOW] is down 12.27% year-to-date and the NASDAQ Composite index is down about 28.00% for the year.
How A Bear Market Affects Your Financial Plan
Depending on your risk tolerance and goals, stocks could make up a large portion of your portfolio. So, falling stock prices could mean that your portfolio loses value in the short-term. However, it is important to remember your goals. If you are saving for retirement in 10 or 20 years, short term fluctuations in stock prices are unlikely to impact your returns in the long run. It is also important to work with an experienced financial advisor to ensure that your portfolio is correctly positioned to help you reach your goals while minimizing unnecessary risk.
How to Respond to Negative Financial News
When faced with the abundance of negative news surrounding the markets and the economy, it is paramount that you keep in mind your unique goals and financial situation. It can also be vital to meet with a financial advisor to discuss how the current economic conditions impact your financial plan.
Make a Plan
With nonstop news about the markets and the economy at your fingertips, you might feel that you need to do something to alter your investments in response. But it is important to view any potential investing decisions through the lens of your goals and your plan for the future.
A financial plan can help you keep track of your short- and long-term goals and lay out steps for reaching them. With a comprehensive plan, you can know where you are headed in your financial future, and what you need to do to reach your goals.
Once You Have a Plan in Place, Stick to It
Research has shown that trying to time the market rarely works and when investors attempt to make trading decisions based on where they think the markets are headed, they can end up losing money. So, once you have established your financial plan, don’t deviate from it based on information you find on news sites. Instead, discuss your concerns with an experienced financial advisor.
Work With a Trusted Financial Advisor
A financial advisor can help you craft a financial plan an investment strategy that is designed to help you succeed. But an advisor’s work is not done when your financial plan is in place.
Your goals, and the markets, shift constantly. So, your financial advisor will work behind the scenes to ensure that your financial plan is up to date, and your portfolio remains in line with market trends and your goals.
A relationship with a financial advisor is ongoing. Your advisor will monitor your investments consistently and check in with you to see if your financial plan needs to be updated. Also, an experienced financial advisor can be the perfect sounding board when it comes to financial news. If you have questions or concerns related to the economy and the markets, reach out to a trusted financial advisor to discuss.
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There can be an overwhelming amount of information when it comes to the economy and the investing markets. That’s why it’s important to have clearly defined goals and a plan for reaching them.
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Remember investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
