Stocks fall and prices skyrocket. How to protect your money

This is an updated version of a story that previously ran on April 28th.

So if you’re looking for ways to protect yourself financially while making the most of what you have, Here are some options to consider.

How is inflation affecting my standard of living?

“If you’re not working or looking for a better job, now would be a good time to take advantage of the very strong job market and secure a position,” said Florida-based certified financial planner Mari Adam.

To help you in your search, here are some resume do’s and don’ts to be aware of.

Benefit from the real estate boom

If you’ve been thinking about selling your home for a long time, now might be the right time to make the jump.
The housing market is on the up, with house prices up almost 15% year-on-year and rents up nearly 17% in April.
Meanwhile, mortgage rates are now about 2 percentage points higher than they were at the start of this year, making buying a home a lot more expensive and all can dampen demand. “I would suggest that anyone planning to put their house on the market do so immediately,” Adam said.

Home loans: Secure fixed interest rates now

If you are about to buy or refinance a home, secure the lowest fixed rate available as soon as possible.

That is, “don’t rush into a big purchase that isn’t right for you just because interest rates might go up. Rushing into buying a large item, like a house or car, that doesn’t fit your budget is a recipe for trouble, regardless of how interest rates move in the future,” said Texas-based certified financial planner Lacy Rogers.

"This is not the retirement I envisioned."  How inflation hits pensioners

If you already have an adjustable-rate home equity loan and you’ve used part of it on a home improvement project, ask your lender if they’d be willing to set the interest rate on your outstanding balance, effectively creating a fixed-rate home equity loan, Greg McBride suggested , chief financial analyst at Bankrate.com.

If that’s not possible, you should consider cashing out that balance by taking out a HELOC with another lender at a lower promotional rate, McBride said.

Covering your short-term liquidity needs

It’s always a good idea to have cash to back you up in the event of emergencies or severe market downturns. But it’s especially important when you’re faced with major events that are beyond your control — including layoffs, which usually escalate during recessions.

That means having enough money set aside in the form of cash, money market funds, or short-term fixed-income instruments to cover several months of living expenses, emergencies, or large, anticipated expenses (such as a down payment or college tuition).

This is also advisable if you are close to or retired. In that case, you might want to put aside a year or more of living expenses that you would normally pay for with withdrawals from your portfolio, said Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab. This should be the amount you would need to supplement your fixed income payments such as Social Security or a private pension.

Additionally, Williams suggests investing in lower-volatility investments like a short-term bond fund for two to four years. This will help you weather market downturns and give your investments time to recover.

Credit Cards: Minimize the bite

If you have balances on your credit cards — which typically have high variable interest rates — consider transferring them to a zero-interest balance transfer card, which locks in zero interest between 12 and 21 months, McBride suggested.

“That protects you from rate hikes over the next year and a half and gives you a clear runway to pay off your debt once and for all,” he said. “Less debt and more savings allow you to better weather rising interest rates and are especially valuable when the economy goes awry.”

If you’re not transferring to a zero-rate debit card, another option might be to get a relatively low, fixed-rate personal loan.

In any case, the best advice is to do everything you can to clear your balances quickly.

Rebalance your portfolio as needed

It’s easy to say that you have a high tolerance for risk when stocks are rising. But you must be able to endure the volatility that inevitably comes with investing over time.

So review your holdings to make sure they’re still in line with your risk tolerance for a potentially rockier road ahead.

And while you’re at it, rebalance your portfolio if after years of stock gains you find you’re overweight in an area. For example, if you’re now overweight growth stocks, Adam suggested maybe reallocating some money into slower-growing, dividend-paying value stocks through a mutual fund.

Also, check if you have at least some exposure to bonds. While inflation has produced the worst quarterly returns for high-quality bonds in 40 years, don’t ignore them.

“Should a recession result from the Fed’s aggressive rate hikes to curb inflation, bonds will likely do well. Recessions tend to be much friendlier for high-quality bonds than for stocks,” said Bennyhoff.

Find out what “losing” money means to you.

If you keep money in a savings account or CD, any interest you earn is likely to be outpaced by inflation. So while you preserve your capital, you lose purchasing power over time.

On the other hand, if preserving the capital over a year or two is more important than risking losing some of it — which could happen if you invest in stocks — that inflationary loss might be worth it for you because you’re getting something Bennyhoff calls a “sleep-free return”.

But for longer-term goals, find out how much you’re willing to risk in order to earn a higher return and prevent inflation from eating away at your savings and profits.

“Over time, you’re better off and more secure as a person when you can grow your wealth,” Adam said.

Stay calm. Give your best. Then ‘let go’

Lightning-fast news of higher gas and food prices or rumors of a possible world war are troubling. But don’t act on the news. Building financial security over time requires a cool, steady hand.

“Don’t let your feelings about the economy or the markets sabotage your long-term growth. Stay invested, stay disciplined. History shows that what people — or even experts — think about the market is usually wrong. The best way to achieve your long-term goals is to just stay invested and stick to your allotment,” Adam said.

During crises of the last century, stocks typically rallied faster than anyone expected at the moment and, on average, performed well over time.

For example, the S&P 500 has returned an average of 11% per year since the financial crisis of 2008 through 2021, according to data analyzed by First Trust Advisors. The worst year during this period was 2008, when shares fell 38%. But for most subsequent years, the index posted gains. And four of its annual gains have been between 23% and 30%.

“Once you’ve built a reasonably diversified portfolio that fits your time horizon and risk tolerance, it’s likely that the recent market decline is just an anomaly in your long-term investment plan,” Williams said.

Also remember: it is impossible to make perfect decisions because nobody has perfect information.

“Gather your facts. Try to make the best decision based on those facts, as well as your individual goals and risk tolerance,” Adam said. Then she added, “Let go.”

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