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It’s been a lucky March so far for investors.
Last Friday’s jobs report from the Bureau of Labor Statistics showed that 235,000 new jobs were added in February, and unemployment stayed the same. That sounds pretty boring to most people. But to us, it sounds like spring has sprung. Not only are the markets smelling the roses and trending upwards but the Federal Reserve is too, with their announcement on Wednesday that they would raise interest rates.
This is the third increase since the financial crisis, and brings the Federal Funds rate up to a range of 0.75% to 1%. We may even see more rate increases in 2017 toward the target level of 2%, if no major economic risks arise. As usual, this is dependent on how the economic data shakes out. The Federal Reserve did not change their economic forecasts from December, and they project GDP growth of about 2.1% for both 2017 and 2018.
All of these factors combined add up to a great atmosphere for savers. Rising rates are great for anyone with a savings account and bondholders deserve to be paid interest for lending their money in proportion to the risk they take. You may be thinking—what about stocks? Don’t bonds and stocks tend to move opposite of each other? No one can predict the future performance of stocks, but even if we experience a dip in the markets, the jobs data and research from the Fed both point to a strong overall economic environment. As usual, we anticipate markets to fluctuate and experience dips during each year. This year, triggers for those fluctuations include Fed increases and changes to fiscal policy. A more likely scenario is the US market may be impacted by issues with the EU.
But as the saying goes, luck favors the prepared. There are several ways you can prepare yourself to be “more lucky” regardless of the investing environment.
Believe you deserve wealth.
Before you save or invest a single dollar, you must believe it is worthwhile for you and that you can achieve better than where you are today. Tomorrow always holds the potential to be brighter than today. A lot of behavioral finance research has gone into exploring people’s “money scripts”—the beliefs about money that either hold you back or allow you to achieve your financial goals. If you live your life thinking “I’m not the kind of person who has money,” you won’t be. This video from Dr. Brad Klontz, founder of the Financial Psychology Institute, explains the impact that money scripts can have throughout generations:
Stack the odds in your favor.
There is no one secret ingredient to higher investment returns, but there are a number of small steps that incrementally improve your chances of success.
- Low investment costs: You keep what you don’t pay for.
- Proper asset allocation: The right mix of asset classes (stocks, bonds, international, and alternatives) to match with your own objectives and risk/return needs. Don’t take on more risk just because your friend does.
- Rebalancing: Your asset allocation can get out of whack as the prices of different assets fluctuate. Periodically adjusting this to match your stated allocation helps to level out market volatility.
- Withdrawal strategy: Not only should you maximize tax efficiency while saving, but this becomes especially important when withdrawing dollars from taxable and tax-deferred accounts.
These small steps can add up to make a big difference compounded over time. Vanguard estimates that the difference can be up to 3% in added returns. Even with a more conservative assumption, the difference is huge. For example, say at age 42, you have $500,000 saved. Without saving one additional dollar, given a 6% return each year, by age 66 that turns into $2,024,467. At an 8% return, it’s $3,170,590. Just 2% can make a million dollar difference!
Automate, don’t procrastinate.
It is all too easy to put off tasks that won’t pay off for years to come, like setting up an estate plan, or saving a little bit extra. So rather than relying on sheer willpower to muscle through, create systems that reduce the tendency to procrastinate and make achieving your goals inevitable. Perhaps for you that means automating savings to remove the temptation to spend, creating a cash reserves plan so you don’t worry about unexpected costs, or outsourcing these and other tasks to an advisor like Halpern Financial who adheres to all of these best practices!
Building wealth doesn’t require the luck of the Irish or finding a pot of gold. The path to a bright tomorrow is made of simple steps, and we can help you get there. In closing out this Saint Paddy’s day post, we hope you enjoy a toast to your health, wealth and happiness in the coming year!
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Halpern Financial, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Halpern Financial, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Halpern Financial, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Halpern Financial, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.