Kevin Bemel ·
Diversify Your Investments NOW
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The date is transcribed from Posts – Sunday 2023. The original publication date has not been independently verified. Historical figures, links, and event announcements are preserved as written.
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6 minutes to read.
The Federal Reserve is in a pickle. Faced with inflation ticking higher while signs of a recession persist, should it raise, lower, or leave interest rates the same? And if people whose job it is to analyze and make decisions about these issues are uncertain, what should we who have to make a living and deal with our investments do? Your best move may be to hedge your investments.
Before we go into how to diversify your portfolio, let’s look at inflation.
Consumer Price Index
Inflation as measured by the Consumer Price Index (CPI) increased 0.2% in July 2023, the same as last month. For the 12-month period from August 2022 to July 2023, it increased 3.2%, up from 3.0% for the period from July 2022 to June 2023. This marks a halt to the 12 consecutive months of declines.
Your own consumption pattern will determine how price increases affect you. For example, if you regularly use a lot of medical care and electricity and don’t use fuel oil, you may feel that your cost of living didn’t increase since the first two dropped in price while the large increase in the third doesn’t apply to you.
You can get greater clarity looking at detailed expenditure categories.
Inflation or Recession?
The Federal Reserve (Fed) has three mandates from Congress:
- Maximum employment.
- Stable prices.
- Moderate long-term interest rates.
Unemployment remains low. However, yields on treasury securities are inverted, meaning that short term treasuries pay a higher yield than longer term ones. This tends to indicate that a recession is expected, which would raise unemployment. That being the case, the Fed would normally lower interest rates.
Despite raising interest rates 5.5% since March 2022, inflation remains above its 2% target. So, there is pressure to further raise interest rates.
Moderate long-term interest rates are generally considered to be in the range of 2% to 4%. As of August 18, 2023, the rates of 10-year and 30-year treasuries were:
- 10-year treasury: 4.41%
- 30-year treasury: 4.32%
Thus, long-term interest rates are a little above the moderate range. This would indicate that the Fed should pause interest rate changes or perhaps lower them.
The Fed has a problem. The indicators are contradictory. And, with an election next year, does it want to gamble on higher inflation or a recession? Aren’t you glad you’re not a Fed governor?
So, what will or should the Fed do? It has been sending mixed signals. The smartest move may be to plan for the worst, that is higher interest rates and a recession.
Hedge by Diversifying
The best investments during an inflationary period and for a recessionary period vary depending on your individual circumstances and risk tolerance. Some general guidelines include:
Inflationary period
- Stocks tend to do well in inflationary periods because they can appreciate along with inflation. It is important to choose stocks that are in defensive sectors, such as consumer staples and utilities, which are less sensitive to economic downturns.
- Real estate can also be a good investment during inflation, as the value of property tends to increase then. Remember that real estate is an illiquid asset, meaning it can be difficult to sell quickly if you need to access to cash. As well, as interest rates rise, property values tend to decrease.
- Commodities, such as gold, oil, and copper, can also be good investments during inflation, since their prices tend to rise with inflation. However, commodities are volatile assets, so do your research before investing.
- Inflation-protected bonds, such as Treasury Inflation-Protected Securities (TIPS), are designed to protect your investment from inflation. But, they typically offer lower interest rates than traditional bonds.
Recessionary period
- Cash is king during a recession, as it provides you with a haven for your money. Keep your cash in a high-yield savings account so that it earns some interest.
- Bonds can be a good investment during a recession since they offer a fixed income stream. Choose bonds that are issued by high-quality companies or governments.
- Dividend stocks may be a good investment during a recession since they provide a regular income stream. Choose dividend stocks that are issued by companies that are likely to continue to pay dividends even during a recession.
- Precious metals, such as gold and silver, can be a good investment during a recession, as they tend to hold their value or even appreciate during times of economic turmoil.
You’ll note that only precious metals are in both lists. You may be tempted to heavily invest in them. But what if some unexpected issue arises that negatively impacts their value? You’ll be sunk. Here are some additional tips:
- Don't try to time the market. Invest for the long term and ride out any short-term volatility.
- Rebalance your portfolio regularly to ensure that it remains aligned with your risk tolerance and investment goals.
- It’s natural to feel anxious during times of economic uncertainty. Nonetheless, avoid panic selling. Stay calm and focus on your long-term investment goals.
Most important: Stay diversified. Spread your investment capital across different asset classes.
It’s important to remember that there is no one-size-fits-all portfolio. The best investments for you will depend on your individual circumstances and risk tolerance. Consult with a financial advisor before making any investment decisions.
Where are you on this journey? Have you set your financial goals?
How can I help you? Call, text, or email me.
Kevin
P.S. Don’t miss this week’s episodes of The WAY to WOW Shows:
Monday, August 21, 10:00 a.m. PT / 1:00 p.m. ET – Trusts & Estate Weekly with my guest Courtney Rollins who will talk about Navigating the Probate, Inherited Property & Senior Transition Process.
Join us live https://www.eventbrite.com/e/633479302647?aff=oddtdtcreator.
Watch the replay https://youtube.com/playlist?list=PLCEw2fI1wAPIQbJD0tdcS8kzFEcpZ0DXz.
Tuesday, August 22, 11:00 a.m. PT / 2:00 p.m. ET – Business Lessons from the Military continues our discussion of Marine Corps Warfighting doctrine.
Join us live https://www.eventbrite.com/e/633485661667?aff=oddtdtcreator.
Watch the replay https://youtube.com/playlist?list=PLCEw2fI1wAPKJNrThFkrivOdTnYZFYNir.
Wednesday, August 23, 12:30 p.m. PT / 3:30 p.m. ET – People Making Money on what types of insurance you may need.
Join us https://www.eventbrite.com/e/633498068777?aff=oddtdtcreator.
Watch the replay https://youtube.com/playlist?list=PLCEw2fI1wAPJjhfe-kkJd0sVsGuTfjWWo.
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