Too often, financial headlines can be misunderstood or a source of fear. Here’s what investors can do with current economic news.
The economy provides a 24-hour news cycle. There is always something to be said about the markets, foreign and domestic. It doesn’t matter where you get your news, there is always something to be said about the stock market, job creation, trade wars, or which media outlet you access, you will always hear something new about the stock market, interest rates, or how world events may impact your finances. Often, financial updates can get a negative spin causing a constant state of worry and angst among investors.
So, what are people supposed to do with the information they receive about the economy? After all, having an understanding of the economy can be helpful for preparing for your long-term financial goals.
Here is what is important to understand about the economy, what has investors worried today, and how to use news about the economy to make smart personal finance decisions.
Economics 101 – The Economy is Cyclical
The Economy is cyclical. The performance of the economy is gauged by many indicators such as Gross Domestic Product (GDP), the unemployment rate, and the stock market’s performance. These indicators fluctuate up and down, and that’s normal. In fact, you can look back at any period in history and know that the only thing that is certain about the stock market is that if it goes down, it will go back up. And when the market is up, it will go down. How long these periods of highs and lows last vary, and sometimes, like during a recession, it can be months or even years, as we saw in the aftermath of 2008.
What Has Investors Worried Today
By all accounts, today’s economy seems stronger than it’s been in decades. The unemployment rate is 3.9 percent. While interest rates are starting to rise, they are still historically low hovering somewhere around 4.4 percent on average. The current U.S. GDP growth rate is 4.2 percent, which is significantly higher than the ideal GDP growth rate of 2-3 percent.
Everything seems like it’s moving at an impressive upward trajectory, so why are economists and investors worried? It’s simple. Markets are cyclical. It will end, we just don’t know when. Growth is good, but growth that happens too quickly can lead to inflation. Inflation can cause growth to ease much quicker than is ideal.
Furthermore, while economic growth can look great on paper, it doesn’t necessarily mean that people are experiencing growth the same way. On the contrary, rapid economic growth can actually cause an imbalance between economic growth and individual wealth creation.
For example, the unemployment rate is down, but real wages, until very recently, haven’t kept up with the pace of inflation. Which means that even though more people are working, they are still struggling to afford the things they want and need, like housing and groceries. And even if they can afford these things, the dollar still isn’t going as far, leaving less money to fund other financial goals or to afford a certain quality of life.
What Investors Can Do
Unfortunately, you are not going to be able to change the cyclical forces in the economy. What you can do, however, is focus on your personal financial situation. By understanding the cyclical nature of the economy and how these matters play out historically, you can still plan accordingly and achieve financial success despite these uncontrollable economic circumstances.
Construct a Resilient Investment Portfolio. We know there will eventually be another stock market pullback or crash, we just don’t know when. Is your portfolio in a place where you would be ok if the stock market dropped 25 percent? Making sure you have the right mix of investments in your portfolio can help protect you against major fluctuations in the market and keep you on track to reaching your retirement goals.
Have Emergency Cash Reserves at The Ready. If you lost your job, do you have funds set aside to replace your lost wages until you get a new job? Aim for three to six months of your known expenses so if the unthinkable happens, you can continue to afford your life while you secure your next job.
Live Within Your Means. Are you living outside your means? Do you have a plan to balance your budget? Only spend what you have, not what you can borrow. Nothing can wreak havoc on your life like getting buried under a pile of debt. No matter what the economy is doing, stay focused on your individual cash flow situation and remain disciplined to not live larger than you actually can.
Ultimately, focusing on a long-term investing strategy, being prepared against life’s “what if” moments, and not overspending income will have much more effect on you and your family than almost anything else in the overall economy. Economic news offers context for today’s investors, but it shouldn’t derail you from your plan and goals.
- Aug 12, 2019 Do I Need Life Insurance? What to Think About Before You Decide Aug 12, 2019
- Jul 15, 2019 Why Entrepreneurs and Small Business Owners Need to Put Profit First Jul 15, 2019
- Jun 10, 2019 The Biggest Question You Might Ask About Social Security Benefits: To Wait or Not to Wait? Jun 10, 2019
- May 20, 2019 2 Critical Ways to Hold Yourself Accountable to Better Financial Decisions May 20, 2019
- Apr 29, 2019 The Psychology of Money, Part III: Pay Now But Consume Later and Invest in Others Apr 29, 2019
- Apr 1, 2019 The Psychology of Money, Part II: Make it a Treat & Buy Time Apr 1, 2019
- Mar 4, 2019 The Problem with Federal Spending - and How It Impacts You Mar 4, 2019
- Feb 11, 2019 The Best Way to Handle Stock Market Ups and Downs: Get Used to Them Feb 11, 2019
- Jan 14, 2019 2 Important Tips on How to Manage the Household Finances as a Couple Jan 14, 2019
- Dec 3, 2018 Can Money Buy Happiness? Dec 3, 2018
- November 2018
- Oct 31, 2018 Lake Road Advisors Announces New Partnership with Vestwell Oct 31, 2018
- Oct 22, 2018 6 Biases That Can Impact Your Financial Behavior Oct 22, 2018
- Oct 8, 2018 Open Enrollment is Coming: Are You Adequately Covered? Oct 8, 2018
- Sep 24, 2018 What Today’s Economy Means For Investors Sep 24, 2018
- Sep 10, 2018 Recent Grad That Can’t Find a Job? Here’s What to Do Sep 10, 2018
- Aug 20, 2018 How Your Financial Planner’s Network Can Help Aug 20, 2018
- Aug 6, 2018 These 2 Accounts Offer the Best Tax Advantage and Here’s Why Aug 6, 2018
- Jul 23, 2018 The Big Difference Between a Fee-Only & Fee-Based Financial Advisor Jul 23, 2018
- Jul 9, 2018 Why Titles Mean Little and Designations Mean Everything Jul 9, 2018
- June 2018
- May 21, 2018 The 5 Most Common Estate Planning Mistakes Parents Make May 21, 2018
- May 7, 2018 Here’s Why You Need to Think About the ROI of Education May 7, 2018
- April 2018
- Mar 26, 2018 Get Beyond The Price Mar 26, 2018
- Mar 12, 2018 Index Funds and Passive Fund Management: Understanding the Opportunity Mar 12, 2018
- February 2018
- January 2018
- Dec 11, 2017 The Psychology of Saving Money: Why some do it successfully and others struggle Dec 11, 2017
- Nov 27, 2017 Why Your Child's 529 Plan Should Be Direct Nov 27, 2017
- Nov 13, 2017 Get on the Road to Financial Success with These 4 Behaviors Nov 13, 2017
- Oct 30, 2017 Know the Lingo - the daily market recap and how it affects you Oct 30, 2017
- Oct 16, 2017 The 3 Unbreakable Rules for Financial Success Oct 16, 2017
- Oct 2, 2017 Follow These Steps When Selecting a Financial Advisor Oct 2, 2017
- Sep 18, 2017 Why You Should Choose a Fiduciary as a Financial Advisor Sep 18, 2017
- August 2017
- Jul 24, 2017 How Am I Doing? Jul 24, 2017
- Jul 10, 2017 Do I Pay Off (Student Loan) Debt or Do I Invest Instead? Jul 10, 2017
- June 2017
- May 29, 2017 Diversification: The Right Way to Manage Risk May 29, 2017
- May 15, 2017 Having A Tough Conversation & Helping Your Aging Parents May 15, 2017
- May 1, 2017 What Everyone Should Be Doing Post-Tax Season May 1, 2017
- Apr 17, 2017 Want to Raise Financially Savvy Kids? Try These 5 Steps Apr 17, 2017
- Apr 3, 2017 Inflation: What Every Investor Needs to Know in 2017 Apr 3, 2017
- March 2017
- February 2017
- January 2017
- Dec 26, 2016 5 Steps to Get Your Finances Ready for 2017 Dec 26, 2016
- Dec 12, 2016 How Much Should I Invest In My Company Retirement Plan? Dec 12, 2016
- Nov 28, 2016 How About What Not To Do With 401(K) Contributions Nov 28, 2016
- Nov 14, 2016 Keeping it All Together: How to Balance Personal Financial Goals with Running Your Business Nov 14, 2016
- Nov 1, 2016 Nervous About The Election And Your Investments? Nov 1, 2016
- Oct 16, 2016 30-Somethings: Why are You Wasting Time Following the Stock Market? Oct 16, 2016
- Oct 3, 2016 Will 30 Year Old's Ever Get To "Retire"? Oct 3, 2016
- September 2016
- Aug 8, 2016 Why Budgeting Doesn't Need to Be a Dirty Word Aug 8, 2016
- Jul 18, 2016 What Does a Financial Planner Do? Jul 18, 2016
- June 2016
- May 16, 2016 It's Urgent, But Is It Really Important? May 16, 2016
- April 2016
- March 2016
- February 2016
- January 2016