Retirees and those planning to retire soon should consider their investment management strategy carefully given the current economic environment. On the bright side, we have time on our side: we can ride out any market volatility. However, we are seeing higher inflation and interest rates than in past years.
So, it is important to keep an eye on both as you build and manage your investment portfolio over time. With this in mind, what follows is a survey of what we believe to be smart personal financial options to weather market volatility.
This article answers the following questions:
- What are TIPS?
- When are cash equivalents a shrewd investment?
- What is the greatest strength and caveat of short-term bonds?
- Could stocks be a profitable investment now?
- What are the advantages of investing in real estate?
- Can gold help preserve investors’ equity?
Treasury Inflation-Protected Securities (TIPS) are a good choice if inflation worries you. These bonds are linked to the Consumer Price Index, which measures the change in prices of goods and services over time. That means you will not lose money in this type of investment, since your payment is adjusted as inflation rises or falls.
The closest thing they have to a downside is their ROI. They do not give investors much yield (a fact that is reflected by their low price compared with other types of bonds on the market today). So, if you are in a hurry to double your nest egg, they may not be ideal as a mainstay of your portfolio.
However, if you are retired and living off your savings, TIPS can help protect against unexpected increases in inflation. The same aspect of their nature that keeps them from jumping in value generally prevents their decline.
Cash, also known as cash equivalents, makes a good short-term investment to place your money in, if you will need it soon. Whether it is for an emergency fund or you plan on buying something before long, cash can also be used as a safety net in case of a loss of income.
For example, imagine that the market crashes and your investments go down 10%: if you still have cash invested in the market that hasn’t changed, it can help you keep some balance between losing money and not losing too much money on paper.
Short-term bonds can also be a relatively low-risk investment for retirees. They also tend to be the most stable. They are less volatile than stocks, which is why they’re often seen as a good place to invest if you’re saving for retirement.
Short-term bond funds are fixed in duration. No investment is predictable. Short-term bonds tend to have lower interest rate risk than intermediate- or long-term bonds, but it is still possible to lose your principal.
If you need a low-risk investment that provides income and stability, short-term bonds might be right for you. The best ones also have relatively low fees and expenses, which makes them even more attractive.
One drawback may be that they offer less growth potential over time in non-inflationary times. This is because they are meant to mature soon after they are purchased (typically within three years). Nevertheless, as interest rates continue rising, their yields may become significant.
Stocks are volatile by nature, so the price of shares tends to change, going up and down. This makes it important to have a long-term perspective when investing in stocks: you will have to weather periods of volatility in order to see the benefit over time.
Since we are in a rising-interest-rate environment, you may want to consider adding stocks to your portfolio. Fixed-income investments tend to lose appeal when interest rates climb because investors will have much more attractive options available.
Historically, they have posted better returns over time than other types of securities such as bonds or cash equivalents like savings accounts and CDs. As a rule of thumb, look for companies with high-quality products and services that people want to buy. Next, seek companies with great brands that will continue to attract customers over the long term.
Dividend growth is important, as well. This may help offset the effects of inflation over time in a tax-efficient manner. In other words, dividend-paying stocks tend to be more tax-efficient than non-dividend-paying stocks.
Real estate can be another source of passive income for accredited retirees. It is considered a non-liquid asset and is typically viewed as a long-term investment.
There are two potential income streams associated with commercial real estate investing: rental income and appreciation of the property over time.
Gold can be a hedge against inflation, interest rate movements, and market volatility. Record-high prices reflect the fact that it can also help ensure equity against geopolitical uncertainty and currency devaluation.
Gold is a tangible asset, meaning that it has a physical form and can be held, stored, and insured. In other words, you do not have to worry about losing any equity if the stock market takes a dip or your bank goes under. You will still have something of substance at the end of it all.
It bears mentioning that gold is less liquid than other assets, including stocks, bonds, and real estate. It does not trade on an open exchange; it is purchased through private transactions between buyers and sellers. As a result, you may have fewer options when it comes to trading gold in your portfolio.
Wealth Management Goals: Your Net Growth
With income and expenses rising faster than expected, these investment decisions may help you protect your assets. However, some may be more effective than others, so it is important to remember that there is no one-size-fits-all solution.
Thankfully, the sheer variety means that there are a lot of different independent wealth solutions for use amid volatility and economic changes.
Looking for an independent wealth management advisor in Minneapolis? Contact us today to schedule a financial portfolio review.
ViaWealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.