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This time last year, the state of the economy was filled with uncertainty. But with aggressive action from the Federal Reserve, the inflation rate continues to cool, sparking confidence going into 2024 from economists and investors alike.
Depending on your investment strategy, you may not need to make any changes in the new year. However, it's still important to stay on top of current trends to determine whether minor adjustments to your approach are worth considering.
Should You Change Your Investing Strategy in 2024?
After an abysmal showing in 2022, the stock market rallied this year. The S&P 500, which represents roughly 80% of market capitalization of U.S. stocks, bounced back from an annual loss of 18.11% in 2022 to a gain of roughly 20% through early December 2023.
The primary issue for investors has been the inflation rate and the Federal Reserve's response to it. From March 2022 to July 2023, the Federal Open Market Committee (FOMC) raised its federal funds rate 11 times to combat 40-year-high inflation rates.
While the consumer price index—the most widely used measure of inflation—has been slow to respond, it has cooled considerably, reaching a two-year low in October 2023. The downward trend has increased optimism among experts that the economy will avoid a recession.
In fact, chief economists from some of the largest banks in North America anticipate that the inflation rate will approach the Fed's 2% target rate in 2024. This could result in the FOMC starting to cut interest rates in the second half of the year.
Analysts from Morgan Stanley recommend that investors pay close attention to the Fed's monetary policy. If you have a relatively short time horizon with your portfolio, you'll likely want to prioritize government bonds and other income-producing investments, which are expected to perform well in 2024.
However, if most of your investments are in a retirement fund and you're still relatively young, it likely doesn't make sense to make immediate adjustments based on short-term developments.
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Investing Tips to Build Wealth in 2024
In spite of cautious optimism for the economy and stock market, it's important to take a measured approach to your investment strategy in the coming year. Here are some steps you can take to manage your portfolio.
Make Investing Automatic
Dollar cost averaging involves investing the same amount on a recurring frequency (once a month, for instance) regardless of how your portfolio is performing. Over time, it can even reduce your average cost basis, thereby increasing your long-term gains.
As you incorporate your investing goals into your budget with automatic contributions, you won't have to worry as much about other expenses eating into your investment opportunities.
This process is simple if you have an employer-sponsored retirement plan because you can ask your payroll manager to take deductions from your paycheck. If you're contributing to an individual retirement account (IRA), brokerage account or some other type of investment account, you can set up automatic monthly transfers from your bank account.
Diversify Your Portfolio
A common technique for reducing your exposure to risk is to diversify your portfolio across different assets. For example, certain stock sectors, including utilities, health care and consumer staples, tend to outperform retail, travel and hospitality stocks during tough economic times. But the latter may be your best bet when the economy is on the up and up.
You can also look for ways to diversify your portfolio across different asset classes. For example, Treasury securities and bonds may not offer high returns, but they won't go negative, and they can provide consistent income. Consider a wide range of financial instruments to try to minimize your risk without limiting your potential for gains too much.
Understand Your Risk Tolerance
Your risk tolerance is the level of risk you're willing to take as an investor. It can be swayed by a variety of factors, including the timeframe for when you need to access the funds you're investing. If your main desire is to protect your investments so you can soon tap them in retirement, your tolerance for potential loss is likely quite low.
As you determine your investment approach, consider how willing you are to risk your money in exchange for the potential for higher returns.
Online risk-tolerance questionnaires can help you get a better understanding of where you stand. In general, the most important thing is to think about how you feel about how your money is currently invested and how economic uncertainty could impact your goals.
Consider Working With a Financial Advisor
Financial advisors have a deep understanding of the market and are on top of the latest news from experts, analysts and economists. As such, they're well equipped to help you make good investment decisions based on your personal situation, needs and objectives.
You'll typically need to pay a fee to work with an advisor. However, that upfront cost can be worth it if it helps you avoid far costlier mistakes that can occur if you make emotional decisions about your investment portfolio.
As you search for an advisor, consider focusing on fee-only advisors who are compensated only for their advice rather than commissions based on products they sell you.
Investing Mistakes to Avoid in 2024
As you assess your investment strategy and consider adjustments to your portfolio, it's important to watch out for potential pitfalls along the way. Here are a few common investment mistakes that set you back:
- Trying to time the market: Analysts expect there to be opportunities for investors to generate positive returns in 2024. But it's important to remember that timing the market is rarely a good strategy for everyday investors. While it's not as exciting, a boring strategy is almost always the best one.
- Not doing the proper research: Social media platforms have become a popular resource, particularly among younger investors. And while it may be tempting to follow the buzz and jump on the bandwagon of the next meme stock, it's always important to use objective market research to make decisions about your portfolio. Instead of relying on word of mouth online, consult stock analysis published by industry experts.
- Missing out on your employer match: Before you invest in an IRA or taxable brokerage account, make sure you're getting the most out of your employer-sponsored retirement plan. If your employer is willing to match your contributions up to a certain percentage of your salary—and there's no yearslong vesting schedule—that's an immediate 100% return on your investment.
- Failing to diversify your portfolio: Even if you're decades away from retirement, it's important to diversify your investment portfolio across multiple asset classes to avoid exposing yourself to unnecessary risk.
Look at Other Ways to Protect Your Financial Health
Maintaining a good investment strategy is important—regardless of the state of the economy—but it's only one piece of your financial plan. Even with recession fears diminishing, it's important to prioritize your financial goals. That can include evaluating your budget and cutting back on discretionary spending, paying down debt, building your emergency fund and investing for the future.
It's also a good idea to monitor your credit and take steps to improve your credit score in case you need to borrow money to get by. While there's no surefire way to predict the direction of the economy, these steps can help you bolster your financial position and improve your odds of avoiding a personal financial catastrophe.