Investing in Changing Times

Many of our clients are asking: How do we navigate in the volatile markets we have experienced for the better part of 12 months now, with the Federal Reserve increasing rates and causing bond yields to rise while prices drop, the S&P 500 falling and uncertainty everywhere? In times like these, many investors “freeze” and do nothing; they stop saving for their individual goals, which often leads to problems down the road.

Homestead Funds can help by providing guidance and support to get you through these volatile markets.

Stay Focused on Your Investment Objectives

We always strive to help our clients meet their financial goals, taking into consideration their individual risk, time horizons and savings needs. Everyone is different but breaking down investing into three basic segments might just be the strategy you need to help thaw your anxieties and concerns and get you back on an investment plan that works for you. In this inflationary and volatile market environment, ask yourself the following three questions:

  • Besides my monthly expenses, what major spending events do I anticipate in the next 12 months? (Put that number in column 1.)
  • Aside from the next year, what monies do I need available in the next one to three years? (Put that number in column 2.)
  • When I look at my overall budget, what I have in total savings, and then subtract columns 1 and 2, what is left over that I will not be spending in the next three years? (Put that in column 3.)

Now we have three buckets of assets that need to be invested to keep up with inflation while providing opportunities for future growth.

  • Column 1 is money you expect to need in the near term. For this, you might want to consider investing in a money market fund. Yields on money market funds adjust daily as rates change. In an environment where rates are expected to rise, money market funds may offer higher yields than bank savings products, which are typically slower to reflect changes in market rates.
  • Column 2 is the amount you anticipate needing in the next several years. Here you might want to build a moderately conservative fixed-income portfolio consisting of short- and intermediate-term bond funds that may be able to provide a yield advantage over ultra-conservative vehicles. These types of investments generally pose less risk than stocks.
  • Column 3 is money you don’t expect to need for several years. Because you have a longer time horizon, you may be willing to accept fluctuations in your account’s value over the short term for the opportunity to earn a higher return over the long term. Here stock funds could be appropriate.

It’s Time to Reevaluate Your Expectations

The past decade was atypical with interest rates at or near zero, cheap financing levels and general global stability. For stocks, this helped prop up company valuations and bolster returns. For bonds, income in the form of yield was difficult to come by. We are now expecting market returns to be closer to long-term historical averages, with short- to intermediate-term bonds offering yields in the 4% to 7% range and broad stock market benchmarks posting returns in the 5% to 10% range. This is the new (old) normal!

Capitalize on Opportunities

For fixed-income investors, income is back. This is great news for retirees and others with some portion of their assets in conservative holdings where it’s been hard to find any return in the past decade. Our representatives can help you rethink your exposures to different asset classes and refine as needed based on evolving market conditions and interest rate expectations. It’s also a good time to check in with your bank balances. Checking and savings accounts are generally slower to reset than money market accounts.

For equity investors, down markets are an opportunity to invest at attractive prices and put your money to work for the long term. For this strategy to be successful, you’ll need to be able to tolerate fluctuations in your account value.

Now more than ever, it’s important to speak with a Homestead investment representative who has your short-, intermediate- and long-term savings goals in mind, even if your investment plan’s “three basic tranches” haven’t changed.

Set up an appointment online to speak with one of our representatives or call us at 800.258.3030.

Debt securities are subject to interest rate risk, credit risk, extension risk, income risk, issuer risk and market risk. The value of U.S. government securities can decrease due to changes in interest rates or changes to the financial condition or credit rating of the U.S. government. Investments in asset-backed and mortgage-backed securities are also subject to prepayment risk as well as increased susceptibility to adverse economic developments. High-yield, lower-rated securities involve greater risk than higher-rated securities.

Equity securities generally have greater price volatility than fixed-income securities and are subject to issuer risk and market risk. The Standard & Poor’s 500 Stock Index is a broad-based measure of U.S. stock market performance and includes 500 widely held common stocks. Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise notated, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.