The Stock Market Is Not the Economy
You’ve probably heard it repeatedly: The stock market is not the economy. But why are news commentators and analysts saying it right now? Read on to find out why and get some tips to help safeguard your money no matter what the economy or stock indexes do.
The Market and the Economy: It’s Not Black and White
Many people believe that if the stock market is skyrocketing, the economy must be doing great. And if the market is plunging, the economy must be lousy. But that isn’t necessarily so.
Investors determine the day-to-day gyrations of the market. They buy and sell based on a range of factors, including economic reports, earnings releases, new legislation, and political trends. They anticipate how these factors will affect publicly traded companies, and they buy and sell based on their expectations.
Essentially, they’re trying to peer into the future. Meanwhile, the economy is happening right now. You’re paying more at the checkout line because inflation is affecting you right now. You’re watching car prices skyrocket because COVID-caused supply chain disruptions are happening right now.
And while you’re feeling the impact of these economic changes, equity indexes are hitting record highs. This apparent disconnect shows that even though the economy and Wall Street influence each other, they do not walk in lockstep. They are not the same thing.
That’s why investors can feel optimistic to the point of speculation while the public pulls back on spending out of concern for the future.
How to Protect Your Money
You may wonder what to do given economic favors like the rise of inflation. The Federal Reserve has called the increase transitory, but many analysts question this stance. And regardless, inflation is affecting you. If you’re closing in on retirement, you might feel anxious about inflation’s potential impact.
Here are seven tips to help safeguard and grow your finances for the long term:
Diversify. No matter what the economy or markets do, a diversified investment portfolio can help you ride out the storm. If you concentrate on one kind of investment (e.g., stocks), one sector (e.g., tech companies), or one location (e.g., United States), you will love it when these areas are hot, but you will probably despair when they’re not. Think of diversification as covering your bases. With a broad range of assets, you help insulate yourself against short-term economic and market moves.
Have an emergency fund. Whether it’s inflation, stagflation, or a recession, your emergency fund can help minimize the impact that economic changes have on your life. For instance, if you lose your job, your emergency fund can help keep you afloat until you find a new one. You should have at least three months’ worth of living expenses in your emergency fund, but it would be better to have six months to a year’s worth.
Put your cash in higher-yield accounts. Your brick-and-mortar bank probably gives you little return for the money you save there. Consider putting your money in a higher-yield account, like an online checking or savings account. As long as the institution is FDIC insured, you enjoy the same protections as your current bank while earning a higher interest rate. Money market accounts also provide higher interest rates.
Buy bonds that adjust for inflation. Treasury inflation-protected securities (TIPS) and Series 1 government savings bonds change their payouts based on the rate of inflation. Be aware, however, that this strategy will also leave you with a lower yield during periods of no to low inflation. A financial advisor can help you determine whether this strategy is appropriate for you and whether you want to supplement it with shorter-term bonds that aren’t adjusted for inflation but are more liquid and less volatile.
Refinance your home. The Federal Reserve may give the green light for raising interest rates. Check into whether you can get an interest rate now that makes refinancing your home a good financial move.
Hedge for inflation. If you are concerned about inflation’s potential to erode your net worth, you might consider traditional inflation hedges such as gold or real estate. Consider talking with a financial advisor to determine if such purchases make sense in light of your financial situation, goals, and current portfolio allocation.
Work with a financial advisor. The right financial planner will give you advice designed for long-term financial well-being. Their advice won’t be piecemeal—it’ll look at all areas of your wealth (investments, taxes, retirement, etc.). The right advisor will help create a plan to take care of you in times of turbulence, and they’ll adjust the plan as needed. Consider working with a fee-only, fiduciary financial planning firm to help make sure your best interest gets put first.
Summary
The stock market is not the economy, and it’s best to look at the market’s day-to-day gyrations with indifference rather than excitement or panic. However, the market and the economy do influence each other. By taking reasonable, practical financial steps like those provided here, you can help safeguard your financial well-being while helping your wealth grow in all kinds of economic conditions.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.