Written by Guest Contributor: Paul A. Werlin, President, Human Capital Resources, Inc.
As we begin another year, it’s a good time to reflect on the past, do our best to understand the present and take our best shot at trying to predict what’s likely to happen in the future. And so, we can position our investments to take advantage of potential opportunities and minimize risks.
While in so many ways, 2021 was exceedingly difficult, from an investment standpoint, it’s been a pretty good year. Stocks reached record highs, and while bond yields have inched up from all-time lows interest rates for borrowers are still very attractive (but still, not so great for bond investors). But energy prices have gone up dramatically, supply chain issues have brought about shortages and increases in the prices of many goods. As I write this, the US Labor Department just released figures on inflation showing consumer prices soared 6.8% in November, with prices for food, gas and housing leading the way to the highest inflation rate for well over three decades.
Let’s not forget higher and higher government spending, which many believe can exacerbate inflation. But employment statistics are looking good, and salaries are rising. Many predicted a strong Christmas shopping season, which is particularly important for the health of our economy.
No one can deny the continued impact of Covid-19 on the economy. The good news here is that infection rates have fallen dramatically as have hospitalizations and deaths. We can only hope, that by this time next year, with more vaccinations, new treatments, and some good luck, we’ll be looking at Covid no differently then the flu or common cold (fingers crossed!)
So, where does that leave us as “average” investors trying to build wealth and save for retirement? While opinions are mixed as to whether the spike in inflation is temporary or more long-lasting, most think that interest rates will continue to rise, at least modestly. And remember, that the price of bonds falls when interest rates rise. If you’re looking for income, diversified income mutual funds and ETFs (exchange traded funds) along with high-dividend stocks may be the smart way to go (see my past article on the Dividend Aristocrats). As discussed in previous blogs, now might be a good time to take a look at annuities with interest rates higher than they’ve been in several years.
For growth opportunities, the future is not at all clear. Technology, energy, and financial stocks have led the way so far this year. But with most averages at or near their all-time highs, there is no solid consensus as to whether in 2022 we’ll continue to see more gains or falling stock prices. But if you’re a long-term investor, which is what about every expert recommends, it’s wise to keep some cash out of the market so you can buy quality companies at “discounted” prices.
If you were at 60% stock, 30% income and 10% cash, perhaps it’s time to reduce your stock expose to 50% and increase cash. (For a better understanding of how changing your asset mix affects your return and risk, check out this nice piece from Vanguard, the giant mutual fund company).
Consult with a trained financial advisor who understands your goals and risk profile as to an allocation that’s best for you.
As we start 2022, we should all be thankful for all the joys and blessing we have, and hope for a happy and healthy new year.
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