Throughout the year, we’ve watched news anchors report on the latest inflation numbers, interest rate hikes and stock market ups and downs. All these stories impact our pocketbooks.
Not only is it important to understand where you are getting your information from, but it’s also important to know how to navigate these financial headlines. Let’s dive into some of the top money stories from 2022.
Inflation increased at very high rates due in part to the stimulus money sent out during the pandemic. The Federal Reserve stepped in and flooded the economy with stimulus money during the pandemic and now they’re trying to slow the economy down. They have taken historic measures to do so by increasing interest rates. Since these measures are so historic, we do not fully know or understand the effects, either long-term or short-term.
Other factors include supply chain issues that impact supply and demand, lower interest rates for the first part of the year that allowed businesses to borrow more money and low mortgage rates that led to a hot housing market and increased wages
During times of high inflation, review your finances to ensure you are spending money on what is truly important to you on a personal level and living within your means. Ask yourself, are you spending money on what is meaningful?
Rising Interest Rates
Interest rates skyrocketed from historical lows of around 0% to over 4% at a record pace. This caused massive repricing in the bond market and in companies with large debt loads. This was the worst year for the Barclays Aggregate Bond market since the 1970s when it was down around 4.5%. That same index is currently down around 16% or four times the worst year in history. This caused major pain for diversified portfolios as the safer bond categories dropped along with the higher-risk stock assets.
With interest rates continuing to rise, yields are currently increasing dramatically. This allows us to generate increased cash flow without taking unnecessary risks. While interest rates are high, avoid taking on debt. This may seem obvious, but it is not. If you can wait to finance something, wait for interest rates to come down. Most economists agree interest rates will fall toward the end of next year. You can save literally tens of thousands of dollars in interest by waiting.
Current Events Impacting the Stock Market
The war in Ukraine has caused a ripple effect of pain across Europe as the EU is dealing with the same inflation and interest rate problems as the US. Energy prices have rocketed even higher across the EU as winter is fast approaching.
Midterm elections cause the market to be volatile. Almost all the polls predicted a “red wave” that did not happen. Instead, we are left without a definite outcome. The markets prefer a split Congress so no big law changes can take effect. It usually takes a month after an election to know if that indeed has happened.
Everyone buying into the market bought at a discount. For those who have been buying this year, they are going to see a large increase in portfolio values if the markets return to pre-2022 levels. They were able to buy at deep discounts allowing them to accumulate more shares in a shorter period.
So, what should we do to maximize our finances before the end of the year?
Update Wills & Trusts
Make sure wills and trusts are up to date. No one likes to deal with wills and trusts, but it is very important they are up to date. Generally, they should be updated every 10 years. Remember, these instruments are not for you. They are for the ones you leave behind. Gather what you need to update your financial plan and your wills and trusts. Get a box or binder and start putting all relevant information in that box or folder. It will make meeting with your financial advisor or attorney much easier and less stressful.
Make Charitable Donations
Do not forget to make year-end charitable contributions. If you are 72 or older, ensure you take your RMD for 2022. Using your RMD money to make a charitable contribution is an easy way to lower your tax liability.
Utilize Tax-Loss Harvesting
This year might be a once-in-a-lifetime opportunity to harvest losses to offset current or future gains. Tax-loss harvesting can be a very powerful tool that is under-utilized. Along the same lines is rebalancing a portfolio. Everyone loves to buy things at a discount. The markets are currently offering historically large discounts on some sectors. We have plenty of clients whose portfolios have become riskier over time as their risk tolerance has gone down. In 2022, we were finally able to sell those riskier assets and realign their portfolios to their risk tolerance without large tax consequences.
Increase Your Contributions
Savings account balances are at record highs right now. Don’t wait too long to invest that money. If you wait too long, you will miss out on buying low. Investing should not be emotional; fear and greed are bad reasons to invest. Some ways you can save and invest in your future include:
- Contribute to 529 Plans! Now is a great time to invest in your child’s or grandchild’s education as 529s typically have a long-time horizon.
- Increase Your 401(k) contributions. As inflation and a tight labor market have increased incomes, consider increasing your 401(k) contributions to ensure you are buying into a down market.
- If you can, consider making IRA contributions, especially if you have cash in the bank.
Those that focus on financial planning have taken advantage of this down market. By focusing on their long-term goals, investors have increased their odds of achieving their financial dreams. If you haven’t prioritized your financial future in 2022, meet with a financial advisor to go through a financial check-up and start a long-term financial plan. If you are not working toward your goals, what are you doing? Our customized financial roadmap is designed for each client's specific retirement wants and needs. Stay connected with all the latest financial news and follow us on Facebook and LinkedIn.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Investment Services LLC nor any of its representatives may give legal or tax advice.