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.
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