As you may or may not have noticed, the markets and economy are starting to get a little more volatile.
This doesn’t mean bad - volatility just means it is unpredictable. Unemployment is very low right now, which tends to mean a growing economy and some inflation - hopefully on wages! With inflation starting to kick off, the Fed is planning to raise interest rates - which will tend to slow the economy and also impact real estate prices.
The stock market is also going to be jumping around more - primarily because of uncertainty. When things like tariffs or trade policy become “tit for tat” it tends to increase volatility because investors have to be reactive instead of proactive - and humans tend to overreact when they get caught off guard. There is also the issue of trade tariffs being very complicated and almost always having unintended consequences - but that is a story for another day.
What does this mean for me?
As we go into financial planning season, there are a couple things you will tend to see me doing/saying/including in your planning:
Cash is the best hedge against uncertainty because it is very flexible. It might not make you much, but more wealth is created by not losing than is created by returns. You’ll hear me telling you (and others) to start increasing cash positions. This is also so that when the crash happens (as it inevitably does when the economy starts heating up), you’ll be positioned to grab the bargains when everyone else is desperate for cash.
I would typically be locking in low interest debt where possible right now - leveraging up now, while money is easy, can be a good plan as long as
- A) it is done appropriately and strategically (think- I have to be able to service the debt, no matter what happens)
- B) it is fixed rates and won’t adjust up as the Fed raises interest rates.
I would be avoiding bonds right now - they will predictably lose value as rates rise. I would rather see an equity and cash portfolio if possible. If anything, consider a high cash value life insurance policy - you’ll get some tax benefits (they can be used like ROTH IRAs), along with a fixed “bond like” return on your cash, and won’t be as affected by rising rates. Yes, “as” affected they will still be affected - but in some cases you can get the life company to guarantee you at least 2% to 3% which is better than a CD and likely better than the bonds you are holding.
And most important of all, the critical piece of advice, courtesy of Douglas Adams, is Don’t Panic. There is nothing that markets and business hate more than uncertainty. But we have had quite a bit of that, and I think we have more coming. Most bad situations in business and investing come from trying to undo shit that you did when you weren’t thinking clearly. So, don’t panic and you’ll likely avoid a lot of problems.