If you have money in the stock market (including a 401k, retirement savings, or any other kind of pension account), you may have noticed it drop significantly last Friday.
I want to spare you all the complicated mumbo-jumbo and get down to the real stuff…
There’s a simple way of understanding what happened to your market money, why it happened, and how to protect it.
To get there, I need to introduce you to the Boogeyman…
As always, I keep my politics and my wealth separate.
Politicians do a really good job of forcing you to mingle the two, but if you’re clear-headed about it, you can keep them clean.
With that said, in this instance, set whatever political allegiances aside, because we will be diving into the Federal Reserve–the Fed Chairman Jerome Powell, to be exact.
Like I said, the market was spooked on Friday by the Boogeyman J. Powell.
The S&P 500 (TICKER: $SPX) dropped almost 2% from the previous day.
That doesn’t sound like a whole lot, but the S&P 500 is a weighted average of a variety of different stocks.
If you’re heavily invested in a sector that got hit particularly hard–Tech for example–you could’ve seen a bigger drop than 2%.
So, that explains what happened.
Now onto the why.
Well, it’s never entirely clear why the market does what it does. It just… does.
But there’s always an array of speculation ranging widely from absolute nonsense to kinda of nonsense/maybe relevant.
It’s very rare you get someone hitting the nail on the head when it comes to why the market dropped, so all we can talk about is the most likely reason.
The Federal Reserve controls interest rates.
Interest rates have been basically at 0% for a few years now.
That means it’s cheap to borrow money. Which in turn means it’s cheap for big institutions and investors to borrow money to throw into the market.
When interest rates start to rise, the fat cats start to pull out and repay those ~0% interest loans.
Well, it just so happens there was talk of a surprise Federal Reserve meeting on February 14th.
Speculation was that the Fed will raise rates between 0.25 and 0.5 basis points (otherwise known as percent), with another kike of 0.5 basis points in March.
That could bring interest rates to above 1% by the end of March.
It doesn’t sound like a big jump, but it’s the start of upward pressure.
So, that’s why the markets (and your investments) were spooked last Friday.
How can you protect yourself?
Well, investing in gold, silver, bonds, and other “safe havens” with a decent piece of your portfolio will help balance out the rocking ship, but you’re never going to avoid it completely.
In times like this, I make sure I’ve got anywhere from 15-30% of my money spread across those avenues. When things smooth out, I dial back a bit on the “safe havens” and go deeper on tech and more revolutionary investments.
That’s my 2-cents on the market spook and how you can make the Boogeyman that is J. Powell not so scary after all.
