A quick scan of top business site headlines will likely convey a common theme: Today’s economy is unpredictable. Over the last three years, a global pandemic and its aftermath have taken the business world on a roller-coaster ride. From initial mass layoffs during the lockdown, it lurched into an epically tight labor market, then — in Silicon Valley at least — back to layoffs again. Supply chain glitches and disrupted production have led to rates of inflation not seen since the early 1980s.
For consumers, these developments mean higher prices on essentials and potential job insecurity. For investors, they mean volatile markets and even less-certain-than-usual returns. Fortunately, investors can take back control of their finances and future with an economy-aware investment strategy.
1. Lay the Groundwork With Healthy Credit and Saving Habits
A carefree attitude in social circles can be freeing, but there’s little place for it with your money. In nearly every aspect of life, dreams without plans to achieve them have a low chance of success. No matter what your idea of financial freedom or success is, you need to have a plan.
When that plan includes investing, you may need to lay some groundwork first. You can’t invest if you have no funds with which to do so. In 2022, the average credit card balance in the U.S. shot up 13.2 %. If you’re among those Americans who have become dependent on revolving credit, you’ll need to change your habits to enable your investment goals. Commit to paying off credit card balances each month so you’re not squandering investable funds paying interest at ever-increasing rates.
That said, carefully consider 0% fixed-term rate offers when you have a large purchase to make. Using this short-term financing option will let you preserve cash liquidity, spread out payments, or earn cash back you’d otherwise miss. This accessible strategy can keep your cash reserves free should you wish to move quickly on an investment opportunity.
Another smart strategy is to create sinking funds to save for major purchases. Homeowners know all too well the sticker shock that often follows a mechanical failure. But if you estimate end-of-life for various household components, you can plan ahead for timely replacement and avoid using credit to cover the cost. Conduct this exercise for fun and opportunistic expenses, too. This way, you’ll have cash on hand for a much-needed getaway or incredible investment opportunity without sacrificing your financial footing.
2. Leverage Tax Knowledge to Minimize Losses and Maximize Opportunities
In an unpredictable economy, the last thing you can afford to do is lean back. Smart investors focus their time on understanding the market, uncovering opportunities, and maximizing the value of their investments. They also concentrate on minimizing losses from all sources — including their tax bills. To grow your wealth, you need to minimize your tax burden to the extent that you legally can. After all, you can’t invest money you’re sending to the IRS.
Not that the tax code only presents investors with sticks — it also offers carrots. But many individuals don’t fully understand tax law or the incentives that abound for investors. Fortunately, finding investments with the biggest payoff isn’t as difficult as you might think. According to LifestyleInvestor.com, Justin Donald shares this rule of thumb on lifestyle investing: “Build assets that the government encourages with tax incentives, such as real estate, businesses, and energy.” Prioritizing tax-advantaged assets can help you grow your wealth faster.
So educate yourself on the tax code and stay abreast of updates to identify investments that may best fit your portfolio. An investment in solar technology for your office, for example, can net federal and local tax credits plus monthly savings on utilities. Plus, many utility providers offer credits or rebates for helping them reach their energy efficiency goals.
If you do find yourself in the position of netting losses on investments, deploy tax-loss harvesting to offset them. The investing world’s equivalent of turning lemons into lemonade, this strategy helps reduce the taxes you pay on capital gains. Assess your portfolio for investments you’re considering offloading either for profit or to stop the bleeding. By pairing a gain with an expected loss, you can minimize the latter’s sting by lowering your tax liability.
3. Diversify Your Assets to Balance Risk
Risk management is key for any investment portfolio, and it’s a principle that’s even more important in an unstable economy. Look at your portfolio’s contents in comparison to a target-date fund, or TDF. These are collections of funds across asset classes with a blend of exposures that balance risk to achieve the investor’s goals.
While your investments may not have a singular drawdown start date like a retirement-related TDF, you can learn from them. TDFs adjust over time, becoming more conservative as the target date approaches. In your portfolio, you may increase or decrease risk at any time based on your goals.
Diversifying your investments can help you manage risk and gain the benefit of asset class performance. Some diversification is easier to implement, as with traditional stock portfolios, but stock market losses are regrettably common these days. In contrast, real estate is considered a reliably appreciating asset, but the current cost of borrowing makes many deals less favorable. Consider including real estate investment trusts in your portfolio instead or invest in a vacation rental. As your asset appreciates, you can tap into its equity to seize other investment opportunities.
When inflation is running high, smart investors can fight back by purchasing series I bonds. Series I bonds yield a composite rate of return that’s partially based on the non-seasonally adjusted consumer price index for all urban consumers. Issued twice a year by the federal government, these bonds give investors a guaranteed fixed rate plus inflation protection.
Having these inflation-linked guaranteed returns in hand can help investors balance the higher cost of borrowing for investments like real estate. I bonds have limits, so they won’t be a total solution to the problem of investing in an unstable economy. However, reserving the $10,000 maximum investment twice a year is a great move for your portfolio.
Developing a Winning Investment Strategy That Stands the Test of Time
A solid investment strategy requires patience, diligence, and a vision for what outcome you’re targeting. Whether you’re laser-focused on early retirement, establishing generational wealth, or living life on your terms, you need a plan. Assess your values as an investor and decide how much you’re willing to sacrifice to reach your goals.
Establish an investment portfolio that balances risk and reward while leveraging the lows to your advantage. When you do, you’ll create a foundation that helps you withstand the economic shifts throughout your lifetime.