4 tips for investors after the Fed’s June rate hike
Wall Street was initially cheered by the 0.75% rate hike announced by the Federal Reserve on Wednesday – a drastic move to curb soaring prices – but the euphoria may be short-lived. While the implications of the decision are felt, many investors remain concerned about the potential for a recession.
Their biggest concern? The central bank hopes to reduce inflation, which is currently at 40-year highs, by making it more expensive to borrow money, which could dampen economic activity for consumers and businesses. Keith Buchanan, senior portfolio manager at Globalt Investments in Atlanta, said that in addition to raising rates, the Fed “also signaled that it expects a slower economy going forward.”
These joint expectations – reduced growth combined with higher rates – are rattling novice traders and investors.
While investors today have myriad opportunities to enter the market at a lower cost than ever thanks to innovations such as fractional shares and the rise of commission-free trading, it also means that many people dive straight to the bottom of the pool. Now that the market is down, myInvestors, especially younger ones, find themselves in uncharted territory.
If you’re worried that your stock portfolio or your 401(k) is weathering what could turn out to be a historically hawkish cycle of policy tightening, the experts have some advice.
keep a cool head
“The most important advice is not to panic. We know stocks create wealth over time,” says Rob Saba, senior portfolio manager at Horizon Investments in Charlotte, North Carolina. “We haven’t seen anything like it for some time.”
Historical market activity confirms this advice. According to the latest report from JP Morgan Asset Management guide to retirementseven of the S&P 500’s 10 best days over a 20-year period between 2002 and 2021 have occurred within two weeks of the index’s worst 10 days.
If you panicked and pulled your money out of stocks right after they had swan dipped, you would miss those bounces.
“Often the most destructive decision one can make is to panic and sell out of markets,” says Saba.
Jack Manley, a global strategist at JP Morgan Asset Management, recently told Money that the recent influx of retail investors combined with algorithmic trading that can execute huge amounts of trading volume in a flash has led to a market more restless.
“The stock market pendulum is swinging very, very wildly,” he said.
Experts say volatility will remain a feature of market activity as participants digest the implications of higher interest rates – and try to work out who wins and who loses as a result.
“We’ve seen credit spreads widen as corporate bonds bake in a tougher macro environment,” Globalt’s Buchanan said.
This means that sectors that depend on debt financing, such as real estate investment, will face greater challenges. Highly indebted distressed companies will find it more expensive to refinance and service floating rate debt. Case in point: On Wednesday, beauty company Revlon cited high debt as the reason for filing for Chapter 11 bankruptcy.
Look for opportunities
Investment pros are urging investors to adopt a half-full mindset: A bear market means investors can buy stocks cheaply…and potentially pick up a bargain.
“This period will provide investment opportunities in certain industries, sectors and asset classes that now seem untouchable or undesirable,” Buchanan said. “Investing continuously and having a disciplined approach to the markets usually pays off in the long run.”
If you’ve got the cash to deploy, Saba suggests you might want to “snack on things that look appealing.”
“Averaging is the best mode of investing, especially during times of emotional selling and even panic,” adds Buchanan. “As we’ve seen, the market has a tendency to cascade down,” and this sentiment-driven momentum can sweep through companies with strong balance sheets as well as weaker ones.
This is where you should look for chances to acquire strategically.
Check your investment mix
Disruptive market events are a good time to evaluate your asset allocations to ensure they are in line with your long-term wealth building goals and risk tolerance. Depending on your comfort level with volatility, your time horizon for retirement and your anticipated financial needs, you should invest in a combination of stocks, bonds and cash.
“Review what your goals are [and] what you’re trying to accomplish, especially if you haven’t reviewed your portfolio in six to 12 months,” advises Saba.
Your equity investments should also be diversified. You should have companies of different sizes represented i.e. small and mid cap stocks in addition to large cap stocks. Different industries thrive in varying economic conditions, so having sectors like healthcare, technology, consumer staples, and industrials ensures your portfolio has a chance to grow in all sorts of markets.
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