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Your Financial Future: Managing your risk

4 min read
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Many investors are trying to figure out how to position their portfolios.

After a market correction earlier in the year, there was a short relief rally for a while. The cable networks and others wanted us to believe that the FED had the situation under control and in a short time, interest rates would start coming down. That is not going to happen any time soon. Some FED officials have said rates will continue to rise and it will be at least the end of 2023 before they start to think about reversing course.

The yield curve has remained inverted for some time now. Normally the long-term bonds pay a larger interest rate than short-term bonds. Investors want higher interest when they commit their funds for a longer period of time.

Currently and for many weeks, two-year government bonds have a higher rate than 10-year bonds. This is often a leading indicator of a coming recession, which we are technically in right now. That occurs when the economy contracts two quarters in a row. Unlike most recessions, we have low unemployment, and there are unfilled job openings everywhere. If the recession deepens, corporate profits will decline and that could put even more pressure on stock prices.

Most people consider bonds to be the safe portion of their portfolio. When interest rates rise like the FED is doing now, bond values fall. The current investment environment now is trickier because both stock and bond values are dropping at the same time. Usually, you do not want these assets’ classes correlated. Also, bank CD rates are very low. There are some investment options that may provide a better return than bonds and CDs.

Today, we live in an international economy. The U.S. is not insulated from what happens outside of our borders. We buy imports which may include natural resources and finished goods from our allies. We also export large quantiles of American-made goods. Without foreign sales, there would be fewer jobs here. High inflation, worker shortages and other economic issues are being felt all over the world. Europe is facing a huge problem as we shift towards colder weather.

Russia supplies large amounts of their energy to Europe. They buy natural gas and oil from Russia. They are so over dependent that their economy is very vulnerable. What if all of these people there cannot heat their homes? What if factories must shut down for a lack of fuel? What does this do to the world economy?

Putin will not hesitate to use energy as a weapon. It is his only leverage. This is his cash cow to run the country and he wants to retaliate against all of the sanctions because of the war in Ukraine. Europe does not have any good short-term options to replace Russian energy. We are more protected because of our domestic supply. Unfortunately, we cannot provide all that Europe needs. Even more scary, is what damage would a nuclear meltdown cause to the whole continent?

The FED is facing a huge balancing act.

When there is a strong job report like last week, there is more pressure to raise interest rates higher and faster. This must be balanced against creating a serious recession. The FED knows they were wrong when they called inflation “transitory.” They know the history of past FEDs during the 1980 when inflation was this bad the last time. Interest rates really spiked then. There are many challenges facing the whole worlds economy and our own. There are no easy or fast solutions.

Make sure your portfolios match your timeline and risk tolerance. Do not be greedy and be afraid of missing some gains. Sometimes it is more important to not lose money than it is to make a lot more. Create a written financial plan that deals with all financial issues. Be conservative in estimates and manage risk. This will give you the best opportunity for success.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.

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