2019 Will Be an Interest-ing Year

In 2017, the Dow Jones Industrial Average (comprised of 30 companies) was up over 5,000 points, and added another 1,300 points in January, 2018. By the end of 2018 it had fallen 3,400 points from its highs.  Yet the US economy remains strong.  What changed?

Interest rates!

Monetary policy is a powerful method the Federal Reserve uses to attempt to control the rate of change in the economy. Policy includes many tactics. One of them is to change the benchmark interest rate.  They reduce it when they want to stimulate the economy and increase it when they want to slow it down.  There were four such rate increases in 2018; three in 2017.

The Fed decided the economy was growing too fast. 4% gross domestic product (GDP) growth and historically low unemployment are certainly better than GDP stagnation and high unemployment.  But left unbridled, this can lead to wealth-killing boom and bust cycles.  By increasing interest rates, the Fed is attempting to create a smoother, more sustainable growth trajectory.

One big problem: They were guessing about when to start and are now guessing about how far to go.  Yes, an educated guess, but still a guess.  So they tend to be late to start rate increases (to be sure the economy can withstand being slowed down without crashing) and to increase rates too far (because the effects are only fully known twelve to eighteen months after the rate change).

Enough of the economics lesson. How are you to invest in this environment?  Here are three strategies to help protect and grow your wealth now.

  1. Have cash reserves and low risk fixed income investments in case you need to rely on them for cash flow if the Fed overshoots and hampers the economy.
  2. Maintain maximum diversification across the global economy to help avoid the risk of individual companies that may suffer in this environment and to capture returns when and where they occur, no matter the locale.
  3. Rebalance your portfolio, selling off asset classes that exceed their strategic allocation and purchasing those that have fallen below their targets while values are low.

By implementing these strategies you can use the current market downturn to your long-term advantage, fighting against the urge to sell temporarily undervalued parts of your portfolio because you don’t need to do so for cash flow, even though you may want to sell.

If you need help weathering the current market environment as 2019 unfolds, the WealthCoaches here at FirstWave Financial are happy to talk with you about how to protect, invest and enjoy your wealth.

The team at FirstWave Financial wishes you a happy and interest-ing New Year!

You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.