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What’s the Impact of the Stimulus on My Long-Term Financial Plan?

What’s the Impact of the Stimulus on My Long-Term Financial Plan?

| March 25, 2021

The $1.9 trillion American Rescue Plan is now law, and deployment has already begun. There was seemingly something for everyone in the plan – both big businesses and small, consumers across a large part of the income spectrum, states and municipalities. The sheer magnitude of the potential impact has already generated a revision in economic expectations for this year. The Wall Street Journal reports that economists it has surveyed now expect 5.95% GDP growth in 2021, which would be the fastest year over year growth since 1983.

In an attempt to quantify the enormity of the task of deploying all that money, the Associated Press reports that "Biden must spend an average of $3.7 billion every day for the rest of this year. That's $43,000 every second of every day until midnight chimes on 2022."

For investors, the challenge is to understand how this turbo-charged economy will impact the markets – and their portfolios. It sounds like it could be a once-in-a generation opportunity, so how to capitalize on it? Let’s look at some potential scenarios.

  • States and cities are likely to get help shoring up their finances and keeping their payrolls intact. Does that mean municipal bonds will be a good investment?
  • How about corporate bonds? With growth on the horizon, rates are likely to go up. Isn’t that a good thing?
  • In equities, is it time to reallocate to value and small caps and away from growth?
  • Since debt is so cheap, and equity market returns look likely to follow the path of the growing economy, is it a good idea to pull equity out of a home and put it to work in the markets?
  • How about bitcoin? It’s a hedge, right? Don’t investors need that?

What are the answers? Here we go:

  • On the muni bonds, if you allocate to munis because you like the tax-exempt feature, then that should be the deciding factor. The rescue package may be positive for fundamentals, but it’s also probably a good idea to be defensive and select bonds that are likely to benefit from our COVID-changed economy.
  • Longer-term corporate bonds are probably a part of your portfolio already. Attempting to increase to capture opportunity – this one is called “don’t try to catch a falling knife.” Companies are rushing to issue bonds now because capital is cheap, and they see the cost of borrowing going up.
  • Tuning up the tactical allocation of an equity portfolio is always a good idea. But just like with munis, balance your exposure to sectors that will likely benefit from vaccine rollouts and a reopened, but changed economy.
  • Investing with home equity? It’s not 2008 for a lot of reasons, but you still have to be able to sleep at night.

What was the point?

In all of those scenarios, you may have noticed that the answer isn’t so much related to economic or market conditions as it is to your existing portfolio and your long-term goals. In other words, it’s more important to stick to your plan and make some tune-ups on the edges than it is to try to capture a very fast-moving situation. 

What can you do?

If you want to make changes, think about where you are in your financial journey first. The fundamental principles of investing should be your guide for any changes you might make.

More than 10 years before retirement: You probably have enough time to increase your overall portfolio risk – as long as it fits with your own personal risk parameters. You should only take the level of risk that allows you to stay invested during downturns.

Five years before retirement: The priority should be putting your retirement plan in place. It’s a good idea to increase your emergency fund and gradually shift enough assets to live on for 3-5 years into lower risk investments, so you’ll be prepared when your income from work stops but your retirement plan is still transitioning. In a rising market, it can make sense to rebalance as often as necessary to keep your asset allocation in place, and instead of reinvesting you can use proceeds to build a bigger cash balance.

At retirement age or in retirement: Regular portfolio tune-ups are critical. If the market goes up a lot, you may need to take higher required minimum distributions, which can impact your taxes. The focus is on keeping your income stable, and that means what comes in and what goes out. 

The bottom line

Investing isn’t just about opportunity – at it’s most valuable, it’s a way to keep your life goals on track. Thinking through how things fit into your plan is more important than how the market is doing. For more information feel free to contact me at michael@diversifiedinv.com


The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. Interest income may be subject to the alternative minimum tax.

Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.