Just a short month ago brought me and my wife to a local Dallas hospital, but thankfully for a joyous occasion – the birth of our little girl. As first-time parents, we had all the usual anxiety, a plethora of questions, and sleepless nights wondering what the future holds for our growing family.
After a successful birth and with many questions still unanswered, we headed home on our new adventure trusting the two of us had enough knowledge and intuition to raise a healthy child. Even riding an all-time high with our new daughter, there is still a world of unknowns ahead of us that can only be conquered with experience and putting education into practice.
This newfound life experience has distinct similarities to the current wealth strategies environment – minus the crying baby of course. Like the anxiety that accompanies almost any new endeavor in life, it is somewhat commonplace for novice investors to tread lightly at first to gain an understanding of the markets, then make strategic moves based on those experiences.
While the overall markets are continuing to exponentially grow, there is an ever-inflating unknown of when this trend will cease. Right now it is not out of the ordinary to be unsure of which strategic moves must be made to stay ahead of the impending bear market, but applying knowledge gained from past experiences and utilizing a certified professional for guidance can have a long-lasting positive effect on your personal wealth health.
The second quarter of 2021 saw momentum continue to swing in the right direction for most investable markets. Headline news typically covered the absurd housing market, skyrocketing costs of durable goods, and a sinking unemployment rate. How all of this correlates to the health of your financial plan can be interpreted in various ways depending on which stage of the wealth-building process you are currently navigating.
From homes to cars to furniture and just about everything in between, it is clear that consumers are on the prowl for the latest and greatest. The housing market, in particular, is fueled by the continually low federal funds rate set by the Federal Reserve, which to many is seen as unsustainable for the long term. While it is ideal for borrowers to have access to cheap money, it is less than desirable to enter another housing bust.
To the dismay of investors, the Federal Reserve must incrementally raise the target federal funds rate. History paints a clear picture of short-term equilibrium with near-zero rates, but long-term, sustainable growth with low to moderate target rates. The problem nowadays is that the equity markets have become overzealous whenever Jerome Powell (Chair of the Federal Reserve) even mentions raising rates within the next few years.
It is tough to blame the investors for this attitude as most people in the wealth accumulation phase entered the market when rates were sub 2%, and their past experience has taught them that raising rates equals an attack on equity growth. For the time being it is clear that the target interest rates will stay steady to keep boosting the overall economy during the “great reopening”, but this is a key metric to note over the next 18-24 months as a factor that could prove deleterious for market performance.
As for the overall market performance of the last quarter, investors that have stayed the course with a well-rounded plan – especially for the past 18 months – have reaped the rewards of a stellar investment market. Specifically, the S&P 500 Index (equity index tracking the largest cap-weighted publicly traded companies) broke through double-digit performance for the year in Q2 with a quarterly return of +8.55% and a YTD return through June 30th of +15.25%. On the opposite side of the investment spectrum is the bond market, typically tracked by the Bloomberg Barclays US AGG Bond Index, which turned positive for the year in Q2 resulting in +1.83% for the quarter and down only -1.60% for the year.
Comparing the two benchmarks for correlation to personal investment achievement can be tricky, but a necessary task when assessing your standing for success.
Targeted risk tolerance, time horizon, and implemented allocation are all applicable measures to use when identifying a benchmark to compare personal performance to the rest of the market. The important factor to remember is like your asset allocation, the comparative benchmark is only able to track real-time and historic data. While there are futures indices, those are used only able to guesstimate short-term expectations. Long-term success within wealth planning takes deep experience, vast knowledge, and absolute belief in a holistic strategy.
The past decade-plus has been spent riding the good life to extraordinary growth within the market and economy, but the real test seems to be looming in the future. Imperative to continuing on a prosperous path is the ability to trust in a sound process through all circumstances.
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