We're not out of the woods yet...
If you've been looking at your 401(k) statements, you're probably relieved to see that the value has been consistently going up. And that is good news, indeed. Once again, wise investors are rewarded for staying calm. Are you one of them? Kudos to you!
Remember, the market is not the economy. The market tends to look at and set prices based on what might happen in the future (six months to a year). As businesses and services are reopening across the country, and the feds and other central banks throw money into the economy, investors are optimistic that consumers are going to start spending their stimulus checks. Also, in reality, payroll is the highest cost on the books; therefore, layoffs often result in higher company earnings and stock prices. It's a big irony that current job losses are painful for workers and yet more profitable for companies in the long run. This is why the market is up, and it's a puzzle at the same time.
The Bureau of Labor Statistics has confirmed that there had been a significant “misclassification error,” indicating that the unemployment rate likely should be higher than the widely reported 13.3% rate. Had they not make this mistake, the number would have been 16.3%. This, in turn, adds to a false sense of confidence about the US economic recovery. So we are not out of the woods yet. Once second-quarter earnings become available (right around the 4th of July), buckle up and prepare for another bumpy ride across the global markets.
With all this in mind, here are our Get-In-Gear tips for the coming weeks:
- Don't back up from stocks. Especially if you are close to retirement. Remember, nobody can time the market—and if someone claims to know, run in the opposite direction.
- Don't become too defensive. CDs, money market accounts, and savings accounts are safe but very low yielding. They will not keep with inflation.
- During rocky times, stay "vanilla". Don't be tempted to invest in fancy alternative investments like hedge funds or private placements. These products are usually very complicated and costly. You are better off sticking to index funds and ETFs.
- Intra-asset diversification is your friend. Make sure than within a stock category, you are exposed to large-cap domestic and large-cap global stocks, as well as small-cap value and small-cap growth stocks. You want to own short-term government bonds and mid-term corporate bonds. Setting a strong foundation is critical to building a diversified portfolio.
- Realign your financial plan with your goals. Think big picture. What have you learned during your shelter-at-home? Are you working in the right field? Are you getting paid fairly for your contribution? How do your aspirations intersect with your money? Never be afraid to ask the big questions. As long as you are moving in the right direction, it’s ok not to have all the answers.
Keep staying safe and well, and stay in touch.