Investing in These Troubled Times
The value of our irreplaceable invested money has been very volatile of late. We have saved for decades and will need these dollars someday. What should we do?
There are many issues behind this volatility: short term (Russia invades Ukraine; stocks and bonds fall in tandem at a pace not seen in decades); medium term (COVID, job disruption, supply chain problems, inflation, trade barriers, sanctions); long term (gradual failure of “liberal democracy,” rise of “populism”).
First, you need a plan for your investments. Each family must know exactly what the family spends now. Looking ahead to retirement and through retirement, you must estimate what expenses will be at each stage in life and where the money will come from – investments, cash, Social Security, pensions, property sales.
Second, you must continue to invest for the future. And, cut back your spending in areas that are not top priority.
Let’s focus on the good news, not the bad:
???????????Unemployment is 3.6%, 2.4 points lower than March 2021. The nation has recouped 20.8?million, or 95%, of the?22 million jobs lost early in the health crisis. The deficit could be closed by summer. Increased spending is one reason the Fed recently raised interest rates to help control inflation.
The value of your house is increasing; your mortgage payment stays the same. Once the mortgage payment is gone, you have more for expenses. One important expense to consider is medical and long-term care costs. If you must move from your home to a nursing home, you can sell the house to pay for many years of high nursing home costs. Mortgage rates now are 5.27%, a 13-year high.?Not to worry, your Money Coach bought his first home with a 7.5% mortgage.?Lived in it seven years, rented the place 28 years.?Paid $46,000; sold $525,000. Property is your best investment.
Inflation is hiking prices, but it also is raising savings rates. The government I-Bond rate May-October 2022 is 9.62%. The “I” is inflation; inflation goes up, the rate goes up. I-Bonds are a must for safe savings. Max per year is $10,000 per person; you cannot withdraw money in year one; withdrawal in less than five years is a 3-month interest penalty. Rate changes every six months based on inflation. Could go to zero but you never lose principle. Online purchase only at TreasuryDirect.gov; account is connected to your personal bank account. Social Security payments are up 5.9% for 2022. Online bank account interest rates should be moving higher soon. Don’t leave much cash in your local bank at zero percent.
You have been forced to save during COVID. The miles you drove in 2020 and 2021 most probably were less because of COVID. Don’t complain about higher gas prices, use the money you saved. You ate out fewer times during COVID. Don’t complain about high restaurant prices, use the money you saved. And remember eating out is a want, eating at home is a need.?Needs before wants!
Here's what to know about investing:
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???????????Inflation – Your cash will buy few products and services in the future. That’s why you need investments.
???????????Diversify – Have a balance of stocks, corporate and government bonds, cash, property, and other things of value. Buy U.S. and foreign stocks and bonds, but evaluate carefully because the demise of globalization will hurt both U.S. and foreign industries. I recommend no more than 50% in stocks for most. Don’t have money in stocks you will need within five years; give the market time to recover. Spend cash first, then bonds, then stocks. Keep moving stocks to bonds and bonds to cash and use the cash for expenses. Don’t concentrate on individual stocks, use Exchange Traded Funds and Mutual Funds which hold many companies. Most of us are not good individual stock pickers. You only need 3 or 4 funds, not 40.
???????????Know your investment risk - When the market goes down, you must be mentally prepared to hold on for the future. When I first started investing, I watched Wall Street Week with Luis Rukeyser. When the Dow Jones average was 940, a guest said it would go to 1400. I said, “no way.” Now it is 32,200 down 4000 from last December. Lesson learned. Let your investments grow without worrying about them.
???????????Keep Investing – It is best to invest the same amount on a regular basis. The idea Is to buy low, sell high.?But that can be a challenge. Lately, I have been buying more after the market dips, but what I buy keeps going down. I now am buying at six-month intervals independent of what the market did the day before. You cannot time the markets.
???????????Investment Advice – Never buy a product from a financial person who makes a commission on the sale. Use a Fiduciary, a financial person who, by law, must put the client first. Best is to learn about investing, then make your own decisions.
???????????Roth Accounts – If you are still working, consider contributing the max to a Roth retirement account rather than a regular retirement account. Regular retirement accounts have a small tax break in the year of donation; Roth accounts have a huge tax break decades later when you take the money out. Some companies have Roth 401(k)s, and there always is the Roth IRA.
???????????Emergency Fund – You must have a substantial amount of cash set aside for unexpected expenses.
???????????Your Money – Remember, your money is your responsibility. Do not turn over this responsibility to anyone else.
Pikes Peak Senior News June – July 2022