It’s been a rocky year for investors for most of 2022 with stubbornly high inflation, rising interest rates, recessionary fears, and the continued war in Ukraine. The market has reentered bear market territory (a decline of more than 20%) after a summer rally. Interest rates have moved higher as investors have digested the likelihood that the Fed will continue to raise rates in their efforts to bring down inflation. They’re hoping they can slow down consumer demand by making it more expensive to get a mortgage, purchase a car, and use credit cards. The chart below shows the rising cost of debt after the Fed rate hikes this year:
|Average Interest Rates|
|PRODUCT||WEEK ENDING||WEEK ENDING||PERCENTAGE POINT CHANGE|
|$30k home equity line of credit (HELOC)||4.24 percent||6.51 percent||+2.27 percentage points|
|Home equity loans||5.33 percent||7.01 percent||+1.68 percentage points|
|Credit card||16.16 percent||18.10 percent||+1.94 percentage points|
|Four-year used car loan||4.8 percent||5.61 percent||+.81 percentage points|
|Five-year new car loan||4.18 percent||5.07 percent||+.89 percentage points|
Source: Bankrate national survey data
Balanced portfolios have continued to struggle as the selloff hasn’t been limited to just stocks. Bonds have also declined as interest rates have risen (bond prices and interest rates move in opposite directions). The yield on the benchmark US 10-Year Treasury recently reached its highest level in over 12 years. However, with higher yields, bonds are now much more attractive than they were a year ago. As interest rates have risen, so to have rates on money market funds, CD’s, and other cash equivalents. Money market funds that were yielding just above 0% at the beginning of this year are now paying over 2%. Higher quality value stocks that pay dividends have held up significantly better than growth stocks this year.
In addition to rising interest rates and high inflation, you may have read that the US dollar index has hit a 20 year high. The strong dollar has impacted the performance of international stock and bond funds which have struggled this year. As the Fed has increased interest rates, the higher yields have increased demand from foreign investors as funds from overseas flow to the US. What does this mean? It’s good news if you’re planning a trip overseas as you’ll get more in exchange for your money. It has the reverse impact though on non-US companies and US companies doing business overseas as it makes them less competitive compared to local competitors. Many US companies have come out in the past several months and lowered their earnings guidance due to the strong dollar including Johnson & Johnson, Microsoft, and IBM. The US dollar could stay strong if we continue to have global recession concerns.
What should investors do now?
- Pay down higher interest rate debt
- Maintain a sufficient cash reserve so that you are not forced to sell stocks at lower levels
- Look for higher yielding options for your cash including money market funds, CDs, short-term government bonds and high yield savings accounts
- Consider I bonds for excess cash. They current yield is 9.62% purchased through October 2022 for the next 6 months. Go to TreasuryDirect for additional details.
- Rebalance 401(k) and HSA investment accounts back to your target allocation
- Maintain a long-term mindset with your investments
Market movements like we’ve seen this year are uncomfortable and can cause anxiety about the road ahead but are part of being a long-term investor. Although market conditions could get worse before getting better, market downturns have historically been followed by market rebounds. Markets are more forward looking and tend to rebound before the economy does. Maintaining a diversified portfolio and having the discipline to stick with it in challenging times is key to having long-term investment success.
Rebalancing – An Important Tool for Managing Your 401(k) Account
How do you keep the emotional side of investing separate from the money you’re setting aside for retirement? It’s a question even the savviest investor struggles with. If you’ve set up a custom investment strategy for your 401(k)-retirement account, when was the last time you rebalanced? Rebalancing is the process of readjusting the asset classes in your portfolio to stay aligned with your preferred allocation. This is an important step in maintaining a sound strategy to build your retirement nest egg. By adjusting the balance of funds in your portfolio, you’re able to bring your investment strategy back to its original target and navigate the ever-changing market.
Why does my portfolio allocation change over time?
Three underlining classes make up your overall asset allocation: equities, fixed income, and cash. Each holds different risks and returns. By mindfully crafting an asset allocation based on your individual profile and overall investment goals, rebalancing allows you to determine how risk is managed inside your portfolio. By increasing risk, you hold more equities; by decreasing risk, you hold more fixed income. And, over time the funds that make up your portfolio appreciate or depreciate, adjusting to the original allocation.
How often should I rebalance?
Regularly scheduled intervals are the best way to keep your goals on target and can be done quarterly, semi-annually, or annually at the very least. Most 401(k) platforms now have an automatic rebalancing feature available and it’s a great tool for maintaining your investment strategy in your employer-sponsored retirement plan.
Things to keep in mind…
As we enter the last quarter of the year, we encourage you to check on your 401(k) retirement accounts. If you’re working with an advisor in managing these outside accounts, ask them about your current allocation and what their strategy is for rebalancing. Maintaining a regular rebalancing schedule is the best way to keep your original long-term goals in sight.
New Tech for Outside Account Management
Did you know that we can move beyond a high-level review to actively managing your outside accounts alongside those accounts we already manage at the firm? This includes assets in accounts such as 401(k)s, 403(b)s, 529s, Health Savings Accounts (HSA), and more. This allows us to help our clients manage their entire portfolio holistically and in alignment with their financial goals, no matter where the accounts are held. We can monitor and manage asset allocation and diversification, as well as rebalance the accounts on a regular basis. For more information, reach out to your financial advisory team and they’ll be glad to assist.
Client Education and Communication
One of the things we are really excited about as we plan for 2023 and beyond is our ability to provide targeted, relevant communication and education to clients. There are two primary factors enabling this change:
- We have a centralized financial planning team focused on understanding client goals, interests, wants, and needs
- Technology which gives us the ability to mine client demographic data in more nuanced ways than in the past
We maintain client information on financial goals, wants, and needs, life stage (age and work status), home location(s), marital status, and much more. With this information, we can share what you need to know when you need to know it, no matter where you are. Practically, this means that we are shifting the way in which we meet, deliver information, and more. Let’s look at an example from this year.
Some of our clients lead very busy lives and have difficulty creating time for a meeting. For those clients, we began recording (Loom) videos so that they could have peace of mind relative to their goals and investment status. The feedback has been excellent. By way of another example, in the coming month, we are sending an educational tax planning video to a group of clients who are retired and a different video for those that are not because tax planning looks different for clients based on their life stage, financial complexity, and other factors. Finally, with COVID, we had many clients move to virtual meetings – made possible by Zoom. Clients found they preferred this mode of communication, feeling just as informed and connected as before, but without the extra time to leave work or home and drive to our office.
Many of you follow our quarterly newsletter, webinars, podcasts, and economic updates. Where we can, we track our reach with these communications and adjust our content and approach as we go. So, though we continue to evolve to stay current (and ahead, at times) of our client’s needs, we want you to know that a great deal of thought and preparation goes into everything we send your way. And, as the years go by, and we become more nuanced in our approach, we will interact with clients in new ways. It’s no longer a one-size fits all world – our growth, team expertise, and technology make it possible for us to be surgical in our approach. For more information about our suite of communication and education pieces, visit our website Resources page: https://stephenswmg.com/resources/
The SWMG team has had a busy summer and early fall. As you know, community involvement is a primary firm value. Over the last few months, we sponsored a table and attended the YWCA Circle Luncheon, attended the Empty Bowls event sponsored by the Food Bank of Eastern Michigan, and attended Community Foundation of Greater Flint’s Art of Philanthropy event honoring Sally Kagerer, Harriet Kenworthy (posthumously), and Dr. F. Michael Jaggi. We are participating in the Flint-based Commit 2 Fit program. We’ve also recorded new podcasts, especially with our retired clients in mind. The most popular podcast over the last quarter will help you learn more about the costs associated with assisted living and how to pay.
We’ve been busy pulling together some great financial planning resources for us to share with clients, just when they need them most. As this newsletter’s easter egg and opportunity to win a prize, let us know if you remember the name of our newest hire – who also serves as the Director of Financial Planning for the firm. Send your response to firstname.lastname@example.org
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