It’s been a crazy few weeks in the market. While we expect continued volatility, the S&P 500 was up over 3% last week, bringing the index down less than one percent year-to-date. I say this often: drops in the market are normal, even in a year that has an overall positive return. Use these fluctuations to your advantage, by tax loss harvesting, rebalancing, and other tax-efficient moves.
The economy is also moving, but in two different directions. It’s called a K-shaped economy, where the rich are getting richer and the poor are getting poorer. Research from Mark Zandi, the chief economist for Moody’s Analystics, shows that the top 10% of wealthiest Americans are responsible for almost half of consumer spending. To flip that, 90% of us provide half the consumer spending in America.
How did those top 10% get there? Many started a business or worked for a company that gave them stock in the company, another form of ownership. A small percentage inherited money or married it. But for everyone else, investing in the market over time creates wealth.
If you’re on the bottom leg of the K, the first step is building emergency savings. This applies to folks who might still be in the shrinking middle, too. It’s taking longer and longer to find a new job. Obtaining new certifications and taking on more responsibilities at work can help. But having six months of living expenses saved can prevent disaster. This is not something you get to overnight; it’s a long-term goal.
If you’re in credit card debt, build a small savings account of $1,000, strictly for emergencies. That might mean $10 a paycheck goes into savings. Then focus on your highest interest rate debt first. Pay that off, and move on to the next.
If your company offers a retirement account like a 401(k) which has a match, contribute enough to get the match. Congratulations! You now have money in the market. And as the saying goes, it takes money to make money. That investment will, over the long term, continue to grow.
If your employer does not offer a plan, you can open an account online with several different companies for as little as one dollar. If you want a passive investment that grows without any effort on your part, a diversified stock portfolio does just that. Regular deposits over time will continue to compound, when the money you made is making more money.
Your action item this week is to check your withholdings. If you owed taxes, consider increasing withholding to avoid a failure to pay penalty next year. There’s a withholding calculator on the IRS website.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.