Tough Times Call for New Playbook, Experts Say

Investing

As Americans face an unprecedented array of challenges as investors, new parents, and health care consumers, it’s time for a more flexible playbook that encourages incremental improvement and resilience, said speakers at the second annual Your Money, Your Health conference.

Key Takeaways

  • Investors optimistic about cryptocurrencies and stocks in early 2022 have faced a rude awakening so far this year.
  • Bonds haven’t been spared, spreading the pain to balanced portfolios which suffered their worst year ever.
  • Stubbornly high inflation has fueled expectations of more interest rate increases by the Federal Reserve,
  • Patience and flexibility can help investors weather bear markets and use them as opportunities to buy discounted assets ahead of a recovery.
  • It’s never too late to start planning for the life you want to lead based on what matters to you.

The event, jointly sponsored by Investopedia, Verywell Health, and Parents, featured a series of expert panel discussions on the intersection of finance and health, from coping with the recent stock market slump to planning for childbirth, healthcare, and retirement.

“We’re in a pretty dire little bear market,” said Investopedia Editor-in-Chief Caleb Silver, opening a discussion on the new rules of investing. The 60/40 portfolio, based on a model that allocates 60% of a portfolio to stocks and 40% to bonds, is having its worst year ever, he noted. “Usually, when stocks are down bonds help you out a little bit. Not the case this year,” he said.

A Historically Bad Year

The 22% decline in the S&P 500 Index year-to-date has 2022 on track to end up as the market’s seventh worst year since 1928, said Liz Young, head of investment strategy for online personal finance company SoFi. Treasury bonds are down 14% and investment-grade corporate bonds have dropped 20% so far this year, according to Young.

“This is the hardest year I’ve ever had as a strategist to try to make calls on what the market is going to do, and it has probably been the most humbling year for many investors,” Young said.

As the Federal Reserve raises interest rates to quell inflation at a 40-year high, the higher rates lower the net present value of the potential future profits of listed companies, she added.

One obstacle for stocks and the global economy is surging geopolitical risk amid the Russian invasion of Ukraine, which threatens to undo the benefits of economic globalization, said Young. The push to bring manufacturing plants back to the U.S. following supply chain disruptions is inflationary, as are trade sanctions and a restrictive immigration policy, she said. 

Dreams of Early Retirement Met Crypto Crash

Investors entered this bear market for risk assets with elevated expectations for future returns, based on Investopedia’s 2022 financial literacy survey, conducted online in January and February. The Gen X, Millennial, and Gen Z investors surveyed favored cryptocurrencies as the asset class was expected to provide the best returns over the next 10 years, followed by stocks. At the same time, the Millennials expected to retire at age 61 on average, while Gen Z members said they could do so at an average age of 57.

“We need to change the definition of retirement,” said Carolyn McClanahan, founder of Life Planning Partners, a financial planning firm. The retirement age of 65 was set in the 1930s, when life expectancy was lower, she said. For those who are in the 60s and feel unprepared for retirement, the solution may be as simple as returning to the workforce, according to McClanahan. “Your human capital is your safest asset,” she said.

Out With the Old Rules

Faced with big swings in economic growth and personal finances, more Americans are abandoning the traditional dream of homeownership in pursuit of extra personal time and increased mobility, said Kristin Myers, editor-in-chief of The Balance. “All of these rules are changing,” she said

Investors can improve returns by building their stock holdings while others panic during bear markets, the panelists said. 

Cash can now earn a higher yield in a diversified portfolio, according to Young. Inflation-protected I bonds present a near-term opportunity, said McClanahan.

It’s important to avoid getting hamstrung by unknowns or your failure to plan earlier for key life events, said financial planner Pamela Capalad, founder and CEO of Brunch and Budget, during the panel discussion on budgeting for a baby.

“There is so much shame and fear and embarrassment from buying into all these things we wish we did in our 20s, the money we should have invested, the money we should have saved,” she said. “And the thing is, you know now. And if you know now and are still not ready to take that step that’s OK too, because when you’re ready you will be able to do it.”

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