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Getting your money right: Understand current market volatility and inflation's impact on your portfolio

Financial advisor Kristin O’Keefe Merrick weighs in on the market, inflation and how it affects you.

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Welcome to Select's newest advice column, Getting Your Money Right. Once a month, financial advisor Kristin O'Keeffe Merrick will be answering your pressing money questions. (You can read her first installment here on what to do with your excess cash.) Have a question you want to ask? Send us a note at AskSelect@nbcuni.com.

Gabriel Trujillo | iStock | Getty Images

Dear Kristin, 

I am doing my best to understand this economy right now. Some say inflation is bad, some say it's normal. I simply don't understand how it all is related to the equity market. What do you think will happen this year? 

Happy New Year, 

Investing in Indiana

Dear III, 

I thought your question was a perfect way to start off the new year. There is so much information out there, too many "experts" and not enough clear and concise commentary to explain the current state of the world. I will try to provide that for you below. I hope it helps. Remember that these are solely my views and not that of my firm or my broker/dealer. 

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Let's talk inflation 

First, in case you need a refresher, let's define inflation:  the increase in prices for goods and services over a period of time. We should remind ourselves that we have not experienced serious inflation in a very long time. In fact, millennials have never been adults during an inflationary period, so this phenomenon is new to an entire generation of people.

From a macro level, inflation is generally a sign that the economy is starting to heat up. It's not necessarily a bad thing for the economy, but because it impacts people on a day-to-day basis, we all notice it more through things like higher gas and food prices. We're seeing inflation across the board — in terms of higher energy prices, wages and costs of transportation — and because we're in a global economy, it's impacting the global supply chain at every level and having a material impact on every sector. 

Recently, the Federal Reserve announced its plan to combat inflation. If you remember, the agency swung into action during the early days of the Covid-19 pandemic in the spring of 2020 and did, in my opinion, a good job of trying to stabilize a very fragile economy in a time of great uncertainty. It pumped money into the system by increasing its bond purchasing program and, in conjunction, kept interest rates at incredibly low levels. As a result, we were able to avoid catastrophe.   

As we have since progressed from the early days of the pandemic, the economy has proven that it's resilient. With government programs in place to send financial support to small businesses and nonprofit organizations through initiatives like the Paycheck Protection Program and direct payments to Americans through extended unemployment benefits, we actually started to see the economy grow. The equity markets reversed course and began soaring again — hello double digit returns! — and jobs have been easier to find. 

Over the past year, we have started to feel the impact of the pandemic in ways that most didn't predict. Supply chains are essentially broken. The labor force is remarkably tight and it's very hard to fill jobs. December's employment data showed us that the unemployment rate is at 3.9%, while at the same time, people are quitting their jobs in droves.

November's employment data reported that 4.5 million people had left their jobs, including one million from the restaurant and hospitality sector. Wages are on the rise because it's so difficult to hire people, which, in turn, has been a huge driver of inflation on the whole. So while you may be bringing home more money in your paycheck, it also means that the extra cash is going toward your cost of living. 

That said, fear not, the Federal Reserve is here to help. Many think that the Fed miscalculated this entire inflation move by calling it transitory inflation — meaning that the situation would sort itself out in the wash. However, over the past six months, there's been a significant change in the way it's treating this situation. According to Goldman Sachs, we'll see four rate increases in 2022 as well as a significant amount of tapering in the bond-buying program. Meanwhile, JPMorgan Chase & Co. predicts there could be more than four rate hikes this year. 

Is it enough? I'm not sure yet. I know it will take time for the Federal Reserve's actions to flow through the economy. In the meantime, however, there's still a backdrop for a robust year in the equity market, as companies continue to sit on piles of cash and are still able to borrow at very low rates. As a result, families and individuals are employed and wages are going up. In addition, individual savings rates have soared to unprecedented levels. 

In an interview on Jan. 10, 2022, Jamie Dimon, Chief Executive Officer of JPMorgan Chase & Co., seemed to agree, saying, "the consumer balance sheet has never been in better shape." Dimon also says he expects exceptional growth in 2022 but predicts higher amounts of volatility. This means the equity market won't be a straight shot higher as we've seen in the past two years, but instead, we will be subject to a lot more ebbs and flows. This has already played out in 2022, as the S&P 500 index dropped at one point by more than 10% from it's Jan. 3 high.

What should you do with your money in 2022?

To be clear, these are not signs of a depressed economy. So what should we do with our money in 2022? I believe there are opportunities in sectors like disruptive technology, clean and renewable energy and electric cars and their underlying lithium and battery parts. I also think we could see a move higher in dividend-paying stocks (ie. blue chips). While this is a sector that has been largely ignored — the focus has instead been on large-cap growth stocks —  with the inevitable rise in interest rates, I believe flashy tech stocks will continue to suffer as many investors take profit on these positions and start to look for yield again. 

Another detail worth mentioning is that your investment choices should be made with a long-term lens. While the market is off to a wobbly start in 2022, it doesn't mean that this should impact your investment strategy. It's also worth noting that we've achieved many new "all time highs" in the equity market over the past few months, so while it doesn't feel great to see a selloff, this is very much normal and expected, especially given the fact that we have had very few pullbacks over the past two years. 

Finally, keep in mind that you are not able to time the markets. And please don't take offense to this, but it's not possible for you to determine or predict market volatility. Therefore, I always suggest deploying a specific amount of money into the markets each month to take the guesswork out of your decision making. And for cash you have sitting on the sidelines, consider putting it in a high-yield savings account. While the APYs are currently small, the money you could earn is more than what you'd be getting from a traditional savings or checking account.

Ensure that your portfolio is reflective of your views and your conscience and is diversified, but not too diversified. As always, I'll remind you that the key to a solid portfolio is a diversified asset mix that's reflective of your risk tolerance. If you're newer to investing, consider a robo-advisor, which will build you a diverse portfolio based on your risk tolerance, time horizon and investment goals. Plus, robo-advisors automatically rebalance your investments over time based on market conditions and how close you are to meeting your investing targets.

This year, I will continue to listen to the Federal Reserve for future cues, invest in companies and sectors that I believe have explosive opportunities for income and growth and continue to invest on a monthly basis because I know that is the best way to work toward a goal of  creating wealth.

Kristin O'Keeffe Merrick is a Financial Advisor and money expert at her family-run firm, O'Keeffe Financial Partners, located in Fairfield, NJ. 

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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