Being aware of your situation informs your actions.
News about war in Israel, war in Ukraine, US political infighting, the lack of a Speaker of the House, inflation, government uncertainty and global unrest might be dominating the headlines, and your mood—but what does it mean for your financial portfolio? There are many ways for an investor to view all the current headlines, and just as many ways to respond. Much of that response is based on how much time you have until you need the money you’ve invested. We’ll look at two scenarios– one for those nearing retirement and one for younger investors who have the benefit of taking a longer term view. We’ll take a look at inflation, global unrest and US political turmoil as the three general themes and offer some perspectives on strategies to employ and questions to ask.
As you approach retirement, your financial portfolio takes on a new level of importance, simply because your earning years are few. Rather than living off a paycheck, your income will come from your accumulated savings. As a result, the stability and growth of your investments will significantly impact your quality of life during your golden years. However, several factors can create uncertainty and potentially erode the value of your nest egg, especially in the face of inflation, political turmoil and global unrest.
Alternatively, younger investors with longer timelines may find unique opportunities to find growth and protect against an erosion of value. The famous quote, “the time to buy [stocks] is when there’s blood in the streets,” refers to the fact that if you can afford to wait out catastrophe—or a nasty bear market—you can invest at low, low prices. Of course, all investments carry risk and there is no silver bullet. Even Jamie Dimon, CEO of JP Morgan recently said, “This may be the most dangerous time the world has seen in decades.” So, buckle up friends, and remember, don’t worry about what you can’t control. Instead, focus on the habits you’ve built to deal with what you can control. For a philosophical take on handling finances, watch episode 3 of Fi-Losophy, where we discuss focusing on habits, and not stressing about what is out of your control.
Inflation, the rise in the prices of goods and services, is an ever-present concern for investors of all ages. When your investment returns do not outpace inflation, your money loses value over time, making it crucial to seek out investments that have the potential to returns that exceed the inflation rate (also known as “real returns”).
For those near retirement, consider diversifying your portfolio. Investing in assets like stocks, real estate and inflation-protected securities (such as Treasury Inflation-Protected Securities or TIPS) can help protect your savings from the erosive effects of rising prices. Additionally, regular reviews of your portfolio and adjustments as necessary can ensure you remain on track to meet your retirement goals.
For those with more time and a higher appetite for risk, consider certain investments, like stocks, real estate and precious metals, that have historically shown the ability to outperform inflation. By allocating your portfolio to these assets, you can potentially see your investments grow in value even as the cost of living rises.
Additionally, be willing to embrace entrepreneurship. Inflation can create demand for new businesses and innovative solutions. As a younger investor, consider entrepreneurial ventures that can thrive in an inflationary environment, such as those in technology, healthcare or green energy.
Global unrest, whether due to geopolitical conflicts, natural disasters, or public health crises, can create market volatility and impact your retirement savings. Just think about the financial turbulence caused by the COVID-19 pandemic. In such uncertain times, the ability to remain flexible and adapt to changing circumstances becomes crucial.
Often, the best way to mitigate risk from global unrest is to maintain a well-balanced portfolio that includes assets with different risk profiles. Having a mix of stocks, bonds, and other investments can provide some stability during turbulent periods. Focusing more acutely in traditionally safe havens, such as gold or government bonds and help as you diversify your portfolio with these assets to protect your wealth during turbulent times. Emergency funds and insurance products can also help you weather unexpected financial storms, especially for those nearer retirement.
New advances in technology often flourish during times of crisis. Consider investing in tech companies that provide innovative solutions for global challenges.
Political instability and changes in government policy can have a significant impact on your investments. This can range from changes in tax laws affecting your retirement accounts to shifts in economic policies that influence market conditions. While you cannot control these external factors, you can prepare by staying informed and adapting your investment strategy accordingly.
Tax strategies need to be considered, especially as you near retirement. Understanding how different accounts are treated from a tax standpoint can make a huge difference in the actual amount of money you take home from your various investments. This is something to be keenly aware of as you near retirement, but also when you are younger to be sure you are set up for success. Your financial advisor or accountant can help you understand the implication of the various account types available to you.
Another strategy to minimize the impact of political turmoil is to diversify your investments not only across asset classes but also across geographical regions. International investments can provide a level of diversification that can help protect your portfolio from domestic political instability. Consulting with a financial advisor who stays up-to-date with global events and their financial implications can also be invaluable.
If you are more inclined to be active in your investing, consider these two approaches.
- Value Investing: When political uncertainty creates market dips, consider the “buy low, sell high” approach. Hunt for undervalued stocks and investment opportunities during periods of market turbulence.
- Sector-Specific Investments: Different sectors may be impacted differently by political events. Stay informed about potential policy changes and invest strategically in sectors that are likely to benefit from the shifts.
Of course, these ideas are for your consideration. There are plenty of investors who make their decisions based on companies, or just play the whole market by using different funds that track the broad indexes. Wherever you are in your investment journey, having a plan and a way to track your investments over time is critical.
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