Experts Share Tips to Maximize Your 401(k) Amid Delayed Interest Rate Cuts: As inflation recovers and the Federal Reserve postpones long-awaited interest rate decreases, it could be advantageous for individuals to reassess their retirement and investment portfolios, according to financial advisors.
The European Central Bank (ECB) indicated last week that its first rate cut could occur in June, whereas U.S. rate cuts are currently on pause. Despite the fact that Europe’s economy is sluggish in comparison to that of the United States, those interest rate cuts could stimulate additional stock market expansion, which would be to the benefit of investors, according to advisors. Conversely, elevated U.S. interest rates may render U.S. fixed income investments more favorable.
“With yields near their highest levels since October 2023, now is an excellent time to purchase U.S. bonds,” said James Sahagian, managing director of Ramapo Wealth Advisors at Steward Partners. Additionally, I believe it is beneficial to diversify beyond the borders of the United States.
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Already, the stock market in Europe is rising.
The Eurostoxx 50, which includes major European stocks, outperforms the Dow Jones Industrial Average. Bloomberg says that the Eurostoxx 50 had gained 8.75% year-to-date and 15.77% in one year as of Tuesday. Compared to the Dow’s 13.91% and 0.29% increases.
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“The European economy is beginning to expand slightly, and (the ECB) can help that by slightly reducing interest rates,” said Derek Miser, Miser Wealth Partners’ CEO and investment advisor.
Pierre-Olivier Gourinchas, economic counselor and director of research at the IMF, wrote in a blog post on Tuesday that “unlike in the United States, there is little evidence of overheating” to revive inflation in Europe, allowing the region to lower interest rates.
The IMF expects Europe’s GDP to grow 1.5% by 2025 and the US’ to slow to 1.9%.
How do lower interest rates help the economy?
Central banks lower interest rates to stimulate slowing economies as long as inflation stays low. Reduced rates lower lending costs, boosting consumer spending and corporate investment. Thus, business profits, output, and production rise, as does the economy.
Unlike when central banks raise rates. High interest rates raise borrowing costs, discouraging consumption and investment to prevent inflation and a strong economy. They also recommend preserving since investments yield higher returns.
Assessed Values
In comparison to European stocks, some financial advisors consider the U.S. market to be overextended following a series of record highs.
Sahagian stated, “European companies are significantly more attractive in terms of valuations.” “That warrants further contemplation.”
LSEG data indicates that the STOXX 600 index in Europe was valued at approximately 15 times its one-year forward price-to-earnings (PE) ratio at the end of March, whereas the S&P 500 index in the United States was valued at 26 times. A reduced PE multiple signifies a more appealing prospect for investment.
The global fund manager survey conducted by Bank of America last month revealed the most substantial increase in allocation to European Union equities since June 2020.
Adhere to U.S. Treasuries.
Advisors are of the opinion that investors should retain their Treasuries, which are currently yielding around 5%, if U.S. interest rates are expected to remain elevated for an extended period of time.
Additionally, it will contribute stability to your portfolio due to its consistent income, as Miser explained.
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How ought my 401(k) to appear if I execute the following actions?
Advisors propose matching bond and stock allocations to risk tolerance and retirement age. As retirement distance and risk tolerance increase, stock weighting increases.
After allocating to equities and bonds, Miser advised investing 20% of equity in a global investment fund.
Sahagian suggests a “barbell” fixed-income investment strategy using short-term and long-term bonds. You get good long-term returns while taking advantage of low short-term interest rates in case rates fall.
A miser invests 40% in two- to five-year notes, 30% in five- to ten-year notes, and the rest in thirty-year bonds. Due to varied maturities, you can reinvest funds at different times and in different ways, including buying additional Treasuries.
Financial experts advise customers to consider their life stage, goals, and risk tolerance before investing in retirement.
Are gold ingots from Costco a wise investment?
Around $2.400 per ounce, gold prices are near an all-time high, reflecting a “crisis of confidence,” according to Sahagian. “People are examining alternative assets that will endure the turbulence and uncertainty that has ensued.” According to advisors, they are dissatisfied with the government and monetary policy in the wake of concurrent conflicts in Ukraine and Palestine and the highest inflation in forty years.
Sahagian stated, “Costco is a reliable source (for purchasing items, including gold bars), but people are seeking alternative investment opportunities.” “Gold is highly esteemed in the majority of cultures across the globe, including India and Africa.” Therefore, is it liquid and a smart idea? You may eventually consider monetizing it.
Miser hesitates somewhat.
“Gold might have been a good investment three and a half to four years ago, when it was possible to buy low and sell high,” he explained. “That is the exact opposite of purchasing gold at this time.” Currently, purchasing power is at an all-time peak, which generally indicates that prices are approaching their termination point.
He stated that Costco gold ingots might be better suited as a novelty item.
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