As Halloween approaches, many are seeking thrills—some by cosying up with a series of scary movies, and others by confronting the unsettling realities of investing through Andrew Ross Sorkin’s book, “1929.” While the spine-chilling tales of horror films and the fears surrounding a potential economic downturn may both elicit anxiety, it’s important to remember that the real world is not on a direct path toward a depression, despite presenting certain risks.
One way to shield oneself from investment-related anxieties is to increase cash reserves. High-yield savings accounts currently offer attractive interest rates, making it a prudent choice to allocate more funds into these accounts. Especially reassuring is the coverage offered by the Federal Deposit Insurance Corporation (FDIC); if your savings balance stays within the insured limits, even the most drastic financial events, reminiscent of the bank runs of the 1930s, should not pose a threat.
Investors are also encouraged to consider purchasing bonds. The Federal Reserve’s current approach contrasts sharply with strategies employed in 1929 when interest rates were raised to combat rampant speculative borrowing for stock purchases. Today, the Fed has opted to lower rates to help stimulate the job market. By investing in U.S. Treasuries or shorter-term Treasury bond funds, investors can enjoy both yield and state income tax exemptions. It’s advisable to focus on shorter maturities to minimize susceptibility to interest rate changes and mitigate price fluctuations.
For those holding stock or exchange-traded fund (ETF) positions, implementing trailing stops can serve as a protective measure. This strategy triggers a sale if the stock or ETF drops by a designated percentage. For instance, if a stock is priced at $100 and a 12% trailing stop is set, the stock will sell if it decreases to $88. If the stock appreciates, the stop price adjusts accordingly, maintaining a protective buffer. However, it’s important to note that this tactic may not offer full protection during a sharp market downturn; in cases of a substantial drop, the stock could be sold at a significantly lower price.
Tax implications are another consideration. While the aforementioned strategies can be utilized within retirement accounts to avoid tax liabilities, investments held in taxable accounts might trigger taxes when profits are realized. Paying taxes is an unavoidable aspect of investing, and while market fluctuations are uncertain, it’s wise to accept some tax liability in exchange for locking in profits—though caution should be exercised to avoid overzealous trading.
In summary, while the specters of economic uncertainty may loom large, there are strategies available to mitigate risk in investing. By setting aside cash, buying bonds, employing trailing stops, and being mindful of tax implications, investors can take proactive steps to safeguard their portfolios this Halloween season and beyond.
