Raising interest rates, high gas prices, and stock market volatility is becoming an ever-changing challenge that each person is forced to overcome.
As everyone was looking forward to putting the pandemic behind us, we are now experiencing a roller coaster within the finance sector that affects everyone. Families are questioning whether now is the best time to buy a home before interest rates get too high. Still, the demand for houses is exceeding the supply in many areas. Inflation has increased to levels we haven’t seen in decades and has caused families to dig deeper into their pockets to pay for everyday expenses. Each week the U.S. sees increasing gas prices and overall costs. If that wasn’t enough, we see a shortage of baby formula across much of the nation.
It can be easy to get frustrated, especially as many people are just trying to find their way out of the pandemic and establish a new rhythm within their lives. As prices rise, families are now forced to make tough financial decisions. Do we buy a new car? Can we afford a family vacation this summer? The last month has proved to be a rough time within the stock market, but it’s not the time to make rash decisions that may hurt you in the long run. I’ll discuss this further in future articles, but attempting to time the market is near impossible. Hedge fund managers try it constantly but typically can never do it routinely.
During these volatile times, many people tend to let their emotions get the best of them, resulting in the selling of investments when they’re at their low points by converting them to cash or bonds. While you’re attempting to protect your money from further losses, this could be a terrible move. Historical trends have shown that when you pull out of the market at a low point, many investors miss the enormous gains that follow a decline, contributing to an overall positive return on their investment. This isn’t to say that selling a stock is bad. Still, you must look at the company specifically and compare it to the overall market. Ask yourself if the company I’ve invested in is a good company with sound financials but is trending negatively because most of the economy is struggling. Has the company become over-leveraged and made poor choices that led to them being less competitive? Has the company lost market share due to another competitor, or is the company suffering from similar challenges within its specific industry? By taking a close look at the companies you’ve invested in, you can draw a more intelligent decision if you still have a sound investment. If a company is operating on solid business choices and isn’t over-leveraged, you can usually rely on the company to ride out rough times.
Don’t rush to a decision and sell your stocks simply because the market is down. Getting out of the market and missing future recovery gains could undercut your overall investment portfolio. The volatility we’re experiencing leads to the topic of diversification and the significant importance of ensuring you’re protecting yourself as much as possible. Many people have been told not to put all their eggs in one basket. Still, everyday families have not applied that lesson in their investments year after year, and it has cost them dearly.
There are countless examples of people whose retirement accounts consist primarily of their company’s stock. While it’s great to believe in your company, you must protect yourself from market turmoil. As the market fluctuates, it may be a good time for you to review your overall portfolio and see how actual diverse you are. There are countless schools of thought on the perfect diversified portfolio. Much of it depends on your risk tolerance and age until retirement. You can afford to take an increased risk when you’re younger as you have a longer investment window. As you move closer to retirement age, you will want to adjust your investments to take less risk. However, you will want to stay in the market as many people will still need money to live long after retirement. I will do a follow-on article specifically on retirement, but the average life expectancy according to the CDC is 77, which means some people may live ten or even 20 years after they retire and need their nest egg to continue to be profitable.
As we move into the summer, we should expect relatively higher gas prices and a highly competitive housing market. Many businesses are still suffering from staffing shortages and supply issues, which many thought would all be behind us by now. If you’re considering buying/selling a home, ensure to look at the trends where your house is located and where you’re looking to buy. Many families are selling their homes over asking, but they are also forced to buy over the listed price, possibly wiping out their sales gains. This should not be a process entered into lightly but a very deliberate action. Ideally, buyers are in good financial standing. They have 20% cash for the down payment and a cash cushion for unexpected home expenses. Remember, it’s currently a seller’s market for much of the country, and buyers need to expect to pay full asking with little to no concessions.
While we’re all experiencing higher costs for nearly everything, it’s not the time for rash decisions. Stay the course with your savings plan, but ensure you budget accordingly. Update your monthly budget to account for daily increased costs to ensure you remain on a positive glide path. High inflation and high expenses will not last forever. When prices come down, you will want to be well-positioned to seize on financial opportunities!