A retired client of mine sent me an email that started: “What a crazy world it’s become! Corona, riots, elections! Who knows what’s next?” I wrote back, “No one knows, but there’s a lot more going on in the world than just that.” I then explained the following three potential money messes and concluded, “They may be unavoidable, but by controlling your response, you can minimize their potential damage to your investment portfolio.”
An increase in taxes
No matter what your political standpoint, it is highly likely that taxes will increase in the immediate-medium future. If (when) this happens, don’t use investment funds to cover the extra cost. The best way to deal with a tax hike is to either cut your spending (so you have extra funds to cover the cost) or increase your income. If you take money out of savings (or decrease the amount you save), your tax bill will hurt you this year and every year in the future as you miss out on potential growth.
An increase in market volatility
This often goes together with the above, because the government raises taxes to bolster its coffers in the case of economic turmoil. While volatility isn’t intrinsically bad, it can hurt you badly if you react to it poorly and sell at the wrong times.
If you find the ups and downs of the market are causing you to worry, consider selling your risky assets, including stocks, ETFs, mutual funds, and commodities. Volatile assets are only suitable for long-term investors who can stomach sharp price movements in the hopes of long-term appreciation.
Continued low-interest rates
The reason for low-interest rates is that the government wants to make its borrowing easier. However, greed encourages people to make the most of this situation by buying higher-risk assets in order to compensate for low rates – and there isn’t always a happy ending here. So watch out. If you’re dependent on a fixed income, you may have to adjust your spending.
If you are mindful of your reaction to the markets, you may be able to avoid potential financial messes that may occur over the coming months. Call 02-624-2788 if you want help in managing your U.S. dollar investments.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 9, 2015. Updated August 2020