Tag Archives: Consumer

Protect Yourself Against Inflation

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“Rising costs can erode your purchasing power if you aren’t careful.” Fidelity Investments

Adding certain asset classes, such as commodities or real estate, to a well-diversified portfolio of stocks and bonds can help buffer against inflation, according to Fidelity Investments.

The last 12 months have seen the highest increases in the consumer price index (CPI) and producer prices (PPI) in decades, and many investors are concerned about the impact that inflation might have on their ability to reach their financial goals.

A trip to the supermarket or your local restaurant brings home the reality of inflation.

The consumer price index (CPI) has risen 8.5% over the last 12 months. Meanwhile, producer prices (PPI) have jumped by 11.2%. Those are the highest rates since the 1970s. And the forces driving prices up such as war, the pandemic, supply chain disruptions, and surging demand from consumers and businesses don’t look to be going away anytime soon.

While it may not be possible to avoid or eliminate the effects of inflation completely, there are actions you may be able to do to reduce its sting.

Add inflation-resistant assets

Though the rise in inflation may be troubling, investors who already have a well-diversified portfolio of traditional stocks and bonds may already have some degree of protection, as portfolios such as these have historically tended to grow even in periods of high inflation. “We still believe that a mix of stocks and bonds can help investors experience growth while managing risk,” says Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC.

Source: Bloomberg Finance, L.P.

Malwal recommend specific steps to help provide additional inflation protection. They emphasize that certain investments that have historically done well in inflationary environments. This has included adding diversified commodities, such as energy, industrial metals, precious metals, and agricultural products, as well as real estate stocks and international stocks.

In the bond market, Malwal notes a greater emphasis on high-yield bonds. “While these carry more risk than investment-grade debt, the higher yield may allow them to more easily withstand any increases in interest rates that might occur in response to rising inflation.” He also highlighted a greater exposure to Treasury Inflation-Protected Securities (TIPS), which are designed to help protect investors from the impact of inflation.

Lastly, short-term bonds have typically experienced less volatility during periods of higher inflation. “We generally have more exposure to short-term bonds than to intermediate-term bonds in client accounts,” says Malwal, “But we also have more exposure to long-term bonds, as they have historically provided stability within well-diversified portfolios during periods of stock market volatility.”

References:

  1. https://www.fidelity.com/learning-center/wealth-management-insights/6-ways-to-help-protect-against-inflationhttps://www.fidelity.com/learning-center/wealth-management-insights/6-ways-to-help-protect-against-inflation
  2. https://www.fidelity.com/learning-center/trading-investing/markets-sectors/peak-inflation

True Cost of Credit Cards

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Credit cards make buying things easy, but at a significant cost

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like a poor credit score or hidden fees.

If you don’t pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

Pros and Cons of Credit Cards

To make the most of your credit cards and maintain a great credit score, it’s essential to understand their pros and cons. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

  • Instant Purchasing Power – Credit can help with unexpected emergency expenses and give you the flexibility to pay them over time.
  • Security – Lose cash, and it’s gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
  • Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
  • Convenience – Credit cards are more widely accepted as a form of payment than checks, and they’re generally faster to use.
  • Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
  • Rewards – Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

  • The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due each month.

It’s important to understand the true cost of credit cards when interest and fees are factored in. Using credit may be less convenient if it means paying more for purchases over time when interest is factored in.

Payment by credit card is quite different from the cash payment methods like cash, check, or debit card. With credit, a promise to pay later is a part of the transaction. With credit cards, credit is provided by a third party (someone other than the seller), the seller receives full payment for the item. The seller must pay money back to the third party who provided the credit. In this way, the person receiving the credit is delaying payment.

Many people use credit to pay for meals at restaurants, even to make small purchases without having to use cash. Because the use of credit is so common, it might appear that credit is unlimited. However, people who do obtain credit are subject to credit limits, meaning that they can only get so much credit.

Get to know these credit cards terms:

  1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
  2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit card balances.
  3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to the amount of money owed.
  4. Credit Line – The maximum dollar amount that can be charged on a specific credit card account.
  5. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
  6. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates in order to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
  7. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
  8. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Credit cards can be a convenient and flexible form of payment, but they have to be used responsibly in order to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

References:

  1. https://www.practicalmoneyskills.com/learn/credit/credit_basics
  2. https://www.econedlink.org/resources/the-costs-of-credit
  3. https://www.thebalance.com/the-true-cost-of-credit-cards-1289627
  4. https://www.practicalmoneyskills.com/learn

Ideas for Frugal Living | Three Life Lessons | Fidelity

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“The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully”

Three (3) lasting lessons from my frugal parent

Frugal living can help separate the important financial expenses from the not so important. Learn helpful lessons and ideas on frugal living here.

BY JEANNE THOMPSON FROM FIDELITY – 06/07/2019

I’ll never forget my first “real” vacation.

Most of our family vacations were camping trips where we slept together in a tent or a pop-up trailer and my mom cooked for my 4 siblings and me at the campsite. But the summer after fifth grade, my father decided to take me, my mom, and my 2 older sisters with him on a business trip to California.

That trip really stood out. I remember relaxing by the pool in sunny San Diego, sipping Shirley Temples with my sisters. We were fascinated by the elevators in our big hotel and rode them up and down until we were sternly told to stop. Simply put, it was paradise.

This trip was an unusual extravagance for my parents, too. You can’t raise 5 children on a limited income without being very frugal. And my parents, who were both first-generation Americans, were used to getting by on very little. Excess was not an option. At Christmas, my mom would save nice wrapping paper and reuse it; boxes were also recycled for many holidays to come. Folding a little piece of wrapping paper in half, writing a note inside, and taping it to a gift worked just as well as buying a greeting card. She reused everything from tin foil to plastic baggies. Her approach to money and possessions was pretty consistent: “Make do with what you have.”

These habits and quirks used to make us laugh. Today, I appreciate the example my parents set. I resist spending money on big-ticket items. My car, for instance, is a 2010 model and has 150,000 miles on it. And most of the furniture in our house is at least a decade old (if not a few decades). I’m not about spending a lot on furniture —with a teenage son, our couch becomes a dumping ground for lacrosse equipment more often than not. I even save nice wrapping paper from time to time, much to the amusement of my kids. And because of the warm memories from that long-ago California trip, I’d much rather spend money on experiences my family can enjoy, like vacations, than on stuff.

Maybe it’s wishful thinking, but I like to believe that my parents’ mindful approach to spending lives on in my kids, who seem to appreciate the value of a dollar on some days at least. My college-age daughter takes pride in her 5-star rating on a ride-hailing app because it entitles her to discounts and coupons. My son, a high school senior, is already savvy about mutual funds and 401(k)s—thanks to conversations he tunes into at home and an intro to business class he takes at school. Both kids know that they need to budget for indulgences beyond the basics and that they’ll have to pay for them with money earned from their jobs.

Both of my parents are gone now, but their frugal approach to working diligently and saving money allowed them to raise kids. And not only that: They put enough away to build a nest egg that funded some retirement travel to Europe, Russia, and Alaska in their golden years. By then my father came around to reasoning: “You can’t take it with you.”

They still managed to leave something behind. The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully—are with all of us. And those occasional splurges they encouraged us to enjoy are as sweet as those long-ago Shirley Temples under the warm California sun.

— Read on www.fidelity.com/mymoney/frugal-living-ideas-and-life-lessons

Schwab Sector Views: New Sector Ratings for the New Year | Charles Schwab

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Macro environment:  Rising stocks and Treasury yields, fading U.S. dollar

We continue to see a gap between the health of the manufacturing sector and that of the services sector and consumers. Despite recent U.S.-China trade war de-escalation, manufacturing activity remains under strain from ongoing tariffs, new tariff threats and still-elevated trade policy uncertainty, combined with slow global growth. On the other hand, the services sector continues to thrive amid strong consumer confidence and consumption, in large part due to a strong job market. 

While economic momentum overall has slowed, we do see signs of stabilization in both the United States and abroad. Accommodative monetary (central bank) and fiscal (tax cuts and government spending) policies have provided a strong tailwind for the global economy. The signing of a “phase-one” trade deal between the U.S. and China, combined with congressional passage of the new U.S.-Mexico-Canada (USMCA) trade pact, have eased some trade uncertainty. Amid this apparent global economic revitalization and shrinking trade risk, Treasury bond yields have risen, the value of U.S. dollar has declined and U.S. stocks have advanced to record highs.

However, geopolitical risks—while reduced somewhat—remain elevated, and equity valuations are high. Given this combination, we think bouts of increased volatility and more frequent pullbacks are possible. This doesn’t necessarily mean the rally won’t keep going—it’s likely the strong momentum in stocks may continue until there is a catalyst sufficient to deflate the current extremely bullish investor sentiment—but the risks need to be considered.
— Read on www.schwab.com/resource-center/insights/content/sector-views

Companies Cut Back, but Consumers Party On, Driving the Economy – The New York Times

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American consumers are energetically engaged in a spendathon. American businesses, by contrast, are not.

Businesses and households swim in the same economic soup and their outlooks — gloomy or bright — are usually in sync. But in recent months, the two seem to occupy opposite ends of a teeter-totter, with consumers continuing to spend while business owners and managers are chastened by doubt and uncertainty.

The economic expansion has extended its record run despite this curious divergence. The question is how long it can continue.

— Read on www.nytimes.com/2019/11/04/business/economy/economy-consumers-business.html

Consumers Won’t Be Able to Save the Economy Much Longer – Bloomberg

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Falling interest rates are likely to deter spending and boost savings rates, further weighing on growth.

A weakening economy may soon hurt consumers.  

 With the unemployment rate at a 50-year low, the hope is that the U.S. consumer will more than offset an otherwise faltering economy. Don’t bet on it.

Clearly, the broad economy is not only weak, but weakening. The yield curve has inverted, with 10-year Treasury note yields falling below two-year yields. Every time that’s happened in the post-war era, a recession has followed if it hadn’t already commenced. No exceptions.

The Federal Reserve Bank of St. Louis reports that the lower real interest rates are at the time of inversion, the longer the recession and the higher the unemployment rate climbs. The real 10-year yield is minus 0.13%, even lower than the 2.2% that preceded the 2007-2009 Great Recession.

— Read on www.bloomberg.com/opinion/articles/2019-10-14/consumers-won-t-be-able-to-save-the-economy-much-longer

Consumer Spending and Confidence

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U.S. Consumers remain confident, strong and spending.

Consumers haven’t cut back spending even as their worries grow. Consumer spending represents about 70% of U.S. economic activity. Nevertheless, U.S. Consumer cannot save rest of world economically, but they can insulate the U.S. economy from the slowing global economic growth particularly in Asia and Europe. The U.S. economy is relatively self contained, but it’s not an isolated island and it can be affected by what’s happening in the rest of the world.

U.S. consumer is in a good place because the labor market remain strong. Despite the silly talk from financial entertainment media pundits about U.S. economy going into recession during calendar year 2019, the main risk for consumers are the alarmist recession headlines which may create a self-fulfilling prophecy.

But waning confidence could cause them to cut back their spending in the months ahead, potentially weakening the economy. A measure of consumer confidence fell in August to the lowest level since the start of the year. Additionally, a gauge that measures what consumers think about their own financial situation and the current health of the economy fell to a nearly two-year low. Monetary and trade policies have heightened consumer uncertainty—but not pessimism—about their future financial prospects.

The main takeaway for consumers from the first cut in interest rates in a decade and from a brief inverted yield curve was to increase apprehensions about a possible recession. Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession. Falling interest rates and am inversion of the U.S. Treasury yield curve have long been associated with the start of recessions.

Source: Surveys of Consumers. University of Michigan, http://www.sca.isr.umich.edu/.