Five Reasons Your IRA is Deflating, and What to Do About It

By Craig Lemoine, Director of Consumer Investment Research

Stocks, bonds and mutual funds have had a rocky start to the year. The S&P 500, a broad measure of the United States stock market, was down 4.6% over the first quarter. Mutual funds holding stocks and bonds have also lost value. These losses are jarring following an outstanding 2021, where the S&P 500 gained just under 30%.

Why the exhale? The balloon was blown up too quickly. Understanding why your IRA or 401(k) has suddenly lost value requires taking a step into the past.

  • Persistent Inflation – A combination of COVID-caused supply chain issues, low unemployment, wage increases and global political uncertainty is clobbering inflation. Rising prices for food (6.3% the last 12 months ending December 2021), energy (29.3%) and all other items (5.5%) have taken their toll on budgets. Recent unemployment numbers are 3.6%, lower than pre-COVID levels. Fewer Americans searching for jobs, coupled with pandemic driven child-care hurdles, have pushed wages higher. Higher wages couple with higher input prices (lumber, steel, commodities, energy), pressuring producers to raise prices. These prices ripple down the supply chain to stores nearby. Inflation has caused the market to pause and raised questions about sustainability and fundamental assumptions around growth.
  • Are We Back to Work Yet? – The COVID-19 omicron variant threw a meaningful hurdle into America’s return to work. Plans to phase back in in-person workforces, employees finding a groove working from home, commuting and traveling were all affected. Sudden economic shifts for any reason add to volatility and, in this case, challenge recovery estimates from last year. Equities have stumbled as future revenue, business model and sales projections have been challenged.
  • The Federal Reserve is Raising Interest Rates to Help Combat Inflation – The Federal Reserve is a governing body for the United States banking system. It has three primary goals: maximize employment, stabilize prices and moderate long-term interest rates. Prices have been anything but stable. The Federal Reserve is raising rates on money it lends to member banks, which will in turn raise rates companies and retail investors are charged when they borrow. Ratcheting up rates will slow down the economy and result in additional adjustments to profitability, revenue and business model expectations. These adjustments have pushed stock prices lower. 
  • Bond Prices Fall When Interest Rates Rise – An economic concept called duration explains the relationship between interest rates and bond prices. Duration can be tricky – take an example of a car company borrowing money. The company plans on using the money to build a new manufacturing facility, and plans on paying it back over 10 years. The company could sell bonds, borrowing money from consumers and paying them back some type of interest every year. At the end of 10 years, the company would pay back the initial loans.

Presume the car company issued debt in 2020 in the form of bonds with a 4% interest rate. The car company will pay 4% on the debt and bondholders will receive a 4% yield.  Fast-forward a year to 2022. The car company needs to borrow additional money. Only in 2022, assume interest rates have risen across the economy and the car company must now pay a 5% interest rate on debt.

Rising rates will push the price of the older bonds down. Investors may have accepted a 4% yield in 2020, but now demand a 5% return. Bond prices will adjust accordingly and drop. In this example, a $1,000 4% bond with 10 years to maturity will drop in price to $920 as interests rise by 1%. Duration will cause bond portfolios to continue dropping as interest rates increase.

  • Uncertainty Feeds Volatility – Stock and bond markets thrive on knowing what will come next. Predictable stability helps companies forecast, make strategic decisions and execute business plans. Stability helps predict future revenue and income, which provides a framework for equity prices. Uncertainty constantly challenges this framework and casts a deeper shadow on assets with risk. More volatile assets, such as bitcoin and tech stocks, have been subject to steeper losses than their more predictable contemporaries.

What do we do from here? Do not panic. Whether you are young or approaching retirement, continue saving for the future. You will be able to buy slightly more stocks, bonds or mutual fund shares with each contribution to your retirement plan than you did when prices were higher. And when you check your retirement balance, remember that historically, stock and bond markets ebb and flow over time.

If you are in retirement, revisit your expenses. Begin the journey of discerning expenses that are fixed, such as rent or insurance premiums, and those you have more control over, such as going out to eat or travel. Inflation hits retirees and those living on fixed incomes the hardest.

Now is a great time to meet with a financial adviser to talk about your portfolio, goals, asset allocation and spending pressure. Financial advisers can provide objective, customized advice to ensure your portfolio is built to fit your goals. No one has a crystal ball, but meeting with a skilled and prudent financial professional can help you create and reevaluate a financial plan in a volatile time. 


Return References: 

S&P 500

December 31st 2021 4,766

January 27, 2022 4,349

The views stated are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.

Investing in mutual funds is subject to risk and loss of principal.  There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.

Exchange-traded funds and mutual funds are sold only by prospectus.  Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds. Contact your Registered Representative to obtain a prospectus, which should be read carefully before investing or sending money. CWM, LLC home office address 14600 Branch St. Omaha, NE 68154, phone: 888-321-0808.

These examples are hypothetical only, and do not represent the actual performance of any particular investments.  Investments in securities do not offer a fixed rate of return.  Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested. 

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

Cetera does not offer any direct investments, endorsement, or advice as it relates to Bitcoin or any crypto currency. This Is for Information purposes only.

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