Where do we go from here
People often ask me the simple question “where should I put my money”? And while that answer usually depends on their personal risk tolerance, age and goals, the question is becoming harder to answer.
As I write this in July of 2021, the stock market and bonds are at record highs and real estate is through the roof. The record prices have a lot to do with historically low interest rates that will soon need to rise again to combat inflation. So how did the economy get here?
Coming out of the 2008 financial crisis, the Fed began lowering interest rates to stimulate the economy. This created a bull market in stocks and bonds, and housing began to recover as lower rates stimulated buying and increased affordability. As the economy hit more rough patches, the Fed kept rates low and even pushed them lower to about zero. The bull markets continued for stocks, bonds and real estate. If you’ve tried to buy a house recently, you know what I’m talking about.
So now what?
Unfortunately the economy is backed into a corner. Inflation is picking up and the way to fight inflation is by raising interest rates. But higher rates will send bonds down, the stock market will drop and the steam will come out of the real estate market. I don’t expect a 2008-type real estate crash, but things will cool off at the very least.
So how do we answer the question, “where do I put my money?” You should always have an asset allocation that you can ride through good and bad times becomes no one knows when the good times end and the bad times begin. So it would be unwise to become paralyzed with fear and change course. If you put a certain amount of money each month into stock and/or bonds continue to do so. But if you are about to take a large position in either I would be cautious. Dividend stocks will soften the blow should prices drop considerably, as will recession proof companies (consumer staples). If you’re buying Bonds, stick with short duration. Yields will be low, but if rates rise you’ll be able to reinvest at higher rates. And for real estate, think about if you really NEED to buy now. If you can wait, you’ll have more options and less competition when the market cools, though higher rates will affect your mortgage cost.
Higher rates are coming and with them a cooling off period for stocks, bonds and real estate. Remember you can’t time the market, but you can proceed cautiously.
