Fantastic amounts of money were made in stocks, homes, cryptocurrencies and more during a pandemic that has killed 6.2 million people and rocked the global economy.
It seems strange, but it shouldn’t. Governments and central banks around the world took exceptional measures to support the financial system during the pandemic, and it overworked. The real mystery is what comes next.
By now, the pandemic has settled at a point where it looks like we can go back to living a mostly normal existence. But in the financial world, we are headed for a period of disruption the likes of which we have not seen since the 1980s and 1990s.
A quick recap of what’s going on: Inflation has hit the highest level in three decades, interest rates are skyrocketing, oil prices are through the roof, stocks are precariously reeling after an epic two-year rally. years and the overheated housing market is losing momentum. Some of these trends may get worse while others improve.
But it is already clear that the worst economic mistake you can make right now is to assume that what worked in the last two years will continue to work. Change is coming, the only question is how much it will hurt. With that in mind, here are five basic personal finance principles for the rest of 2022.
With your work: Apply for a pay raise or bonus right now; if the economy slows down, and that is expected as rates rise, then employers will be much less open to pandering to workers and may resort to layoffs.
With your debt: If your debt makes you sweat, pay it off whenever possible; Reducing your mortgage balance means less exposure to higher rates when you renew; When renewing a mortgage, fighting for the lowest rate is more important than ever.
With your savings: Move your money to banks that are responding to rate increases with better returns for savers; Ultra-secure high-interest savings accounts offer top rates of 1.5 to 1.7 percent and one-year guaranteed investment certificates pay up to 3.1 percent.
With your investments: It’s time to take out the trash and focus on quality; get rid of your portfolio of speculative stocks or funds that have previously lost momentum; Consider GIC instead of bonds to avoid the drop in bond prices caused by rising interest rates.
With your intentions to buy a home: With rates on the rise, the fear of losing something should give way to the fear of overpaying at the peak of the market; walking around with an open wallet in a bidding war seems so 2021.
Rising interest rates are the main driver of the financial changes to come. At their pandemic lows, rates buoyed stocks by making saving and conservative investing look futile. They also kept home buying affordable, even as prices rose by large double-digit amounts in cities across the country.
But a three-decade trend of falling rates has ended. Rates occasionally rose higher during that period, but modest inflation meant they didn’t have to stay high for long. Current inflation is intolerably high and must be hit repeatedly with rate hikes. Expect the Bank of Canada overnight rate to rise another 0.5 percentage point on June 1 and continue to rise.
Governments have contributed to the money generation of the last two years by pouring money into supporting businesses and individuals whose livelihoods have been affected by the pandemic. Like central banks, governments arguably overdid it. But if they had been stingy with this help, could we be talking about deflation instead of inflation right now?
While we were in a health emergency for the last two years, the financial environment rewarded aggressive and bold thinking about risk and money. Median resale home prices nationally increased 31.6 percent in March 2021, year over year. If you bought that red-hot market, you were in a position to benefit from the 11.2 percent gain of the last 12 months.
The S&P/TSX Composite Index was up 44.3% for the 12 months ending March 31, 2021, on a total return basis based on changes in stock price plus dividends. If you bought that red-hot market, you were in a position to profit from the 20 percent gain of the last 12 months.
Low rates and government support fueled those increases more than anything else. The end of both presents the risk that the era of pandemic wealth accumulation will end not with a whimper, but with a bang.
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