Bubble Bursting

The economy has always moved in cycles. There are times of vigorous expansion followed by periods of slower growth or retraction. It’s been happening since the dawn of recorded history and will likely continue to go that way for generations to come. There are a million theories to explain this phenomenon, from sun spots to demographics, but the “why” is less important than the demonstrable fact of the business cycles.

When people talk about “bubbles” and “bursting,” they’re putting this widely observable fact into panic-inducing language for the purpose of sensationalism. A headline reading “Economy doomed due to bursting bubble” sells a lot more papers than one that reads “Economic cycles continuing as normal for past and foreseeable future.” Yes, some periods of economic retraction are more intense than others, but the sky is not falling.

Federal Reserve meetings have begun regularly discussing the possibility of raising interest rates. Such a move might make several investments that have been lucrative for several years, such as insurance companies and financial service providers, suddenly less attractive. Such a shift, particularly by investment-generating annuities and other managed funds, will drive down prices in these sectors.

Changes are likely coming in the economy and it makes sense to modify your investment strategy. Sensible investors respond to market conditions to protect their portfolio. There are a number of seasonal adjustments that can help to insulate you from the inevitable retraction. You should discuss these moves with a qualified financial advisor.

1.) Sell off risky investments

Most people who predict a bubble bursting have some idea of what industries are exposed to the greatest levels of risk. Popular choices include real estate, financial services and manufacturing. These industries are generally more exposed to volatility in the market, so it makes sense to shade your portfolio away from these sectors.

This isn’t a permanent move. This is part of the most basic wealth-building strategy: sell high and buy low. Stocks and funds that comprise these sectors are likely near a temporary high. Their prices will fall and investors who sell will have the opportunity to reinvest at much friendlier prices.

2.)  Shift to non-cyclical stocks

“Sell in May and walk away” is common stock market advice. Many sectors, especially cyclical consumer goods, tend to notice dropoffs in their stock prices during the summer months. Families choose to spend their discretionary money on vacations and other experience-related items instead of electronics or fancy clothing. While this advice is generally good, it’s incomplete.

Rather than leaving your investments in cash, move them into less volatile options. With interest rates poised to go up, bonds and other savings instruments can be a good way to shield yourself from risk. This is called “defensive investment.” When you expect stocks to perform slightly worse than average, investment vehicles, which are less influenced by market forces, become smarter picks.

3.) Adjust your retirement plans

One of the only dangers to the coming retraction is to people who are planning to retire in the next year or two. Those folks may experience a dramatic dip in their available retirement funds right at the time they need it. If retirement plans are flexible, it makes sense to wait out a market downturn. Postponing retirement by a year or two can improve your standard of living dramatically.

Otherwise, not only will you not be pulling out money from your retirement account at the time you can least afford it, but you’ll also lose out on years of buying cheaper stocks. Those prices will rebound eventually, which will magnify the return on those dollars. Earnings invested in down economic times are worth more in retirement than those invested in boom times.

4.) Stay calm

If you’re invested in managed funds, you may not need to take any action. Mutual funds, which are widely diversified, will likely continue to experience a similar rate of return. Individual securities will fluctuate wildly in price and sector funds will also be subject to some day-to-day volatility. Market-wide index funds will have slightly higher day-to-day changes in price, but on the whole, will still experience the same gradual rate of return. Odds are good your retirement account is in one of these funds if you selected it in consultation with a retirement planner.

As always, you need a certain amount of money available easily in case of emergency.  This is where Destinations Credit Union can help.  We have lots of savings options that will help you get the best return on your safe (insured) and liquid cash.  Payroll deductions or automatic transfers can help you save painlessly.  
You don’t need to panic about your 401(k) and put all your money in a mattress. You don’t need to quit your job and run for the hills. You may need to adjust your portfolio to take advantage of changing market conditions, but you shouldn’t stop planning for the future. Keep calm and save on!

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