The US stock market underwent it's first 10% correction in 2018, and now stocks are on the edge of all-time highs, and driven higher by corporate earnings.
But, with global trade tensions growing day by day, rising short-term interest rates, and indications of moving into the late phase of the business cycle, a stock market decline may be on the horizon.
Indeed, Paul Tudor Jones, a hedge fund investor famous for predicting the 1987 stock market crash, is expecting a market crash as soon as 2019. He told Goldman Sachs, that "We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs such as bubbles in stocks and credit." Jones isn't the only one predicting an imminent crash. Scott Minerd, Global chief investment officer and chairman of investments for Guggenheim Partners, told Times that, "The markets are potentially on a collision course for disaster." The majority of financial experts seem to agree: the economy has been too strong for too long, and now, something's got to give.
So, how can you prepare for the inevitable down turn? Here are six tips to help you protect your income in the case of a stock market decline.
Invest for the Long Term
While what goes up must come down, the opposite is also true when you're talking about the stock market. Though the stock market rises over longer periods of time, it's often interrupted by short-term downturns. The short term is ruled by investor confidence, meaning changes can happen quickly. But the long term tends to be more about real wealth creation as companies generate free cash flow and pay down debt. So, your short-term plays should only make up a small portion of your overall investment portfolio, as these can be more subject to damage in a volatile market.
Invest in Individual Companies Instead of Indexes
If the market begins to fall, it's best to have your money in individual companies that you believe in, instead of allocating money to an investment fund that tracks an index. Francis M. Kinniry, head of portfolio construction at Vanguard, told the New York Times that, "It's not an active versus index story, it's high cost versus low cost. They underperform because they're charging too much for the 'alpha' they generate," he added, referring to the return in excess of the market return.
Have as little debt as possible
Debt only gets harder to pay off during a decline in the market. Make sure that you aren't spread too thin on margin (borrowed funds to invest with) when a market crash starts to look likely.
After the last market crash, Europe and Japan were slower to recover than the United States and therefore still have years to go before they crash. Darrell L. Cronk, president of the Wells Fargo Investment Institute, said that the recoveries in Europe and Japan started closer to 2014, as opposed to 2009 in the United States. So, your money may actually be safer invested overseas.
Diversify your Investments
As the saying goes, don't keep all your eggs in one basket. Make sure you don't have all of your money tied up in one place, because then a sudden drop could mean financial disaster. Instead, diversify your stock portfolio, and diversify across different asset classes and regions as well. How you invest depends on your risk tolerance, time horizon, and long and short term goals. Careful diversification can be one of the best tools to come out of a stock market crash financially intact.
Cash is King
Wall Street Journal
Tying up all your money in the stock market is never a good idea. Make sure you have some cash saved to get you through in case your investments take a hit, or some cash in the money market. Your goal should always be to conduct your affairs so that if you were to get laid off or meet some other unexpected cash expense, you would not be on the brink of disaster.
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Whether you are looking for a new job or trying to grow in your current one, getting a certification can be a great way to improve your skills.
Anyone can put that they are proficient in a computer program on their resume but having a certificate can help you stand out amongst the competition and give credence to the strength of your skills.
But what's the best way to invest in yourself without breaking the bank? Some certification programs can cost hundreds if not thousands of dollars. We are going to walk through six of the best certifications you can get for $100 or less.
Who is it best for: Those who work with analyzing and presenting data.
Cost: $100 for Tableau Desktop Specialist; additional certifications are available for a larger fee.
More companies than ever see themselves as data companies. Being able to understand data and use it to guide decisions at your company is often critical to taking on a leadership role. Not to mention, being able to present the data in a clean, attractive, and compelling way can help get buy-in from others in your organization or clients. That's why Tableau is a great tool to have in your toolbox.
Tableau allows you to create interactive visual analytics dashboards. In layman's terms, you can take data; create graphs, maps, or charts; and then allow end-users to interact with these graphics to better understand the information. It's a fantastic tool allowing non-technical users to gain insights for data-driven decision-making.
Tableau Desktop Specialist certification starts at $100 and has no expiration date. There are many videos on Tableau's site to prepare for your exam as well as Tableau Starter Kits allowing you to play around and learn the different capabilities of the program. Tableau offers a 14-day free trial as well as free license for one year for students.
Additional certifications after Desktop Specialist are Desktop Associate and Desktop Professional. Those working with a Tableau server may also be interested in a separate certification as a Server Associate or Server Professional.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.