The economy is entering treacherous investment territory. Inflation just spiked to a 40-year high, the U.S. Federal Reserve is raising interest rates for the first time in years, and stock, bond and crypto investors are trying to decide whether the latest dip is a red flag or a buying opportunity. For people just starting out as investors, this is a confusing and risky time. Here are some guidelines for navigating these volatile markets successfully.
In high-risk times like these, it is important to pull in your horns and stay as close to cash as possible. Get rid of meme stocks, or anything you do not fully understand. Remember that investments that have done very well but would normally be considered risky – those cruise ship junk bonds that pay a bit more yield, or the bitcoin futures your friends talked you into – will be the first thing everyone sells if the markets tank. You want to be already out the theater door before anyone yells “fire.”
Money market funds pay scant interest, but that will change as the Federal Reserve starts to raise rates in March. They will never be a match for 7 percent inflation, but neither will they ever lose principle, in the way cratering stocks or bonds can. Plus, they are easy to trade into and out of, so when things stabilize you can easily shift back into stocks, bonds, or crypto.
Unless you are a professional investor, this is no time to be gambling on stocks. They remain massively overvalued and the market is precariously dependent on a record amount of margin debt – far more than there was before the 1929 crash that led to the Great Depression. Margin debt fuels both bull and bear markets, often turning the latter into routs.
Inflation favors borrowers by eroding the value of the debt they owe, so fixed-rate debts like mortgages are not a problem. However, some types of debt have floating rates, usually tied to the Prime Rate, which in turn is influenced by the rate that the Federal Reserve is planning to raise. Home Equity Lines of Credit (HELOCs) and credit cards often have floating rates, and these will soon be more expensive. If you have the means to pay down your debts, floating-rate debts like these should be the priorities.
In general, remember that preserving capital by reducing risk in times of uncertainty is always preferable to taking a big loss in a downturn. That sort of loss can take years to recover from. In this economy, for the time being, it’s better to be safe than sorry.
One of the most dependable ways of money management is to find a healthy spending habit that works for you.