Lately, economic news can feel like whiplash. Inflation is cooling, but your grocery costs are still steep and dining out at a restaurant seems twice as expensive as it used to be. Gas at the pump has finally started to drop in price, but energy bills are still high.
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With a new presidential administration set to take over in January 2025, with policy promises like increased tariffs, it can be easy to fall into confusion around how you should maintain your investments. What’s an American to think about these confusing economic signals? And more to the point, how should you manage your investments?
Eric Kelley, chief investment officer at UMB Bank, cut through the confusion to offer some explanation and tips to manage your investments.
If you’re shaking your head every time you hear that inflation has come back down to normal because you’re still paying more for goods and services, Kelley explained why.
When inflation is coming down, Kelley said, “That does not mean prices are falling. That means prices are rising at a lower rate. The prices are still even higher than they were last year.”
Unfortunately, Kelley said, these prices are not likely to ever return to pre-pandemic levels. “That price shock is here to stay, and we pray that [they] just stop going up so much because the only way for everything to get cheaper is for us to go through a nasty recession.”
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Whatever you do when economic signs get confusing, don’t panic and don’t make financial moves based on said panic. Just this past week, The Federal Reserve Board (The Fed) suggested it will be making more rate cuts in 2025 in response to news that inflation may not cool as much as hoped. Kelley said this initiated a bit of a panic-sell of stocks which he called “not a terribly rational move.”
Additionally, though unemployment numbers are currently still low, some signals have made investors nervous. For example, some of President-elect Donald Trump’s proposals — such as mass deportation of immigrants lacking permanent legal status, many of whom perform a significant amount of work in key industries, and imposing steep tariffs on imported goods, which could increase prices of goods — prompt feelings of uncertainty.
Uncertainty, Kelley said, “makes everyone uncomfortable.” But that doesn’t mean you should make a financial move in response.
The best way to not only respond to confusing economic signals, but weather short-term ups and downs is not to panic, but to have a solid long-term plan, Kelley said. You should know your risk tolerance, your asset allocation and “anchor back” to that when uncertainty and volatility increase, he said.
“The folks that don’t have really solid long-term financial plans are the people that get nervous and they sell low and buy high and things don’t end up very well sometimes,” he said.
Additionally, reevaluate your plan at the end of every year, ideally with a financial advisor or planner.
If you’re not clear on what a “solid financial plan” entails, Kelley suggested it’s knowing what your short- and long-term goals are, such as retirement, paying for kids’ college, buying a home and so on. Then, you need to ask some questions:
“What is your cashflow that you need now to live and how can you fund your long-term goals through savings? What’s the maximum amount you can save? How do I match up my risk profile to my needs and my tolerance?”
If you have a plan and are able to follow it, especially if you aren’t immediately retiring or making another big life change, “then you will be able to weather the storms without getting emotional. And that’s the most important thing anybody can do,” Kelley said.
In general, it’s good to expect some volatility and plan for it, Kelley said. This will especially be true of 2025.
“We do think that next year we’re set up for a year where volatility is higher than it’s been for a while. There’s going to be more choppy markets than up and down days and days like yesterday all throughout 2025. So the average investor needs to figure out how to weather that and how to get themselves through that without getting emotional.”
If you don’t have quite as much luxury of long-term planning for reasons like retirement, you still have “the same metrics” Kelley said. Then it becomes about looking at the spend rate of the assets you’ve accumulated for retirement, and figuring out how much you can spend until or if you take Social Security.
If your portfolio doesn’t quite seem like it will tolerate the market volatility, you might have to consider working a little longer or changing your spending plan.
“It’s just a dance. You go through all the math and you look at the scenarios, you look at the risk that’s required and you work your way through to a decision. It’s just a different basket of variables if you’re 60 as opposed to 30,” Kelley said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 5 Investing Tips To Combat a Confusing Economy
