Your 2023 financial checklist: 5 questions to ask your advisor now

YOU PROBABLY HAVE A LONG LIST of concerns when it comes to the economy, inflation, interest rates, market volatility and other factors that could affect your finances in 2023. Given the turbulent nature of the markets in 2022, checking in with your advisor could be especially important now as you take stock of where you are and consider what, if any, adjustments you may need to make. These five questions can provide a useful framework for that important discussion.

What can I do to help my portfolio recover from last year’s volatility — and where might I look for new investment opportunities now?

A: “This will be a foundational year for investors of all types,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Now is the time to review your portfolio in detail and prepare not only for next year but also the next decade.”

Here are some near- and long-term moves to consider: “During the first half of the year, you may want to emphasize high-quality bonds — U.S. Treasury bonds, investment-grade corporates and municipals, and higher-quality mortgage-backed securities — all of which are providing significant income for the first time in many years,” Hyzy says. “Then, if inflation subsides and the Federal Reserve pauses its interest rate hikes, equities — especially in more value-based areas and higher quality defensives  — may take over some of the momentum that bonds had provided.”

“But the most important thing is to position your portfolio for the long-term,” he adds. “That means having broad diversification within stocks and bonds, with some exposure to alternative investments if you are a qualified investor — one for whom alternatives are appropriate. Also consider investing in some of the themes, such as digitization, healthcare, automation, climate mitigation and renewable energy, that are likely to help drive the world forward.”

How will we know when inflation has peaked, and what do today’s higher interest rates mean for my fixed income?

A: “It’s difficult to know when inflation has peaked and won’t reaccelerate,” says Matthew Diczok, head of Fixed Income Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. To fight inflation, the Fed is not only rapidly hiking interest rates but also doing what is called quantitative tightening — no longer buying government bonds and letting those it already owns mature. “Those measures are likely to succeed in bringing down inflation,” says Diczok. But, he adds, during the past two periods of high inflation, post-World War II and during the 1970s, inflation spiked three times before it finally kept falling.

“Even if we can’t say for sure that inflation has peaked, we do know that today’s bond yields are higher than they have been in a long time,” says Diczok, noting that the income bonds provide can play an important role in diversifying your portfolio. Even though short-term bonds currently pay higher rates than longer-term bonds, Diczok suggests investors consider longer-term maturities. “If you invest in a slightly longer maturity bond portfolio now, even at a lower current yield, you lock in that rate for a much longer time,” he adds.

With mortgage rates at a 20-year high, what’s the outlook for the housing market in 2023?

A: “During the past year, mortgage rates have more than doubled, and that creates problems for anyone who wants to finance the purchase of a home,” says Marci McGregor, senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. Yet McGregor notes that one of the Fed’s goals in raising interest rates is to cool off a hot housing market that has contributed to inflation. And if the central bank’s moves tip the nation into recession, as now seems likely, McGregor says, some of the recent rate hikes may be reversed, and mortgage rates could start to come down again.

In an economic downturn, home prices could also retreat from recent highs, although demand from house-hunting older millennials may work against that downward pressure. “I think of it as a tug of war,” says McGregor. “But as the economy slows, a combination of lower mortgage rates and more affordable prices could make it a great time to buy a house.”

How could the new makeup of Congress affect my finances?

A: In a newly divided Congress, it’s unlikely that tax increases or other major legislative proposals will become law, McGregor says, but there’s also a risk that legislation that needs to pass early in the year to keep the government open may have trouble getting through. “That could add to market volatility in the near term,” she says. “But I do think there could be bipartisan cooperation about Ukraine and China policy, for example — and both of those could lead to higher defense spending.” Another key area for investors to consider is cyber security, she adds. And as existing bills like the Inflation Reduction Act and 2021’s Infrastructure Investment and Jobs Act continue their rollout,  investment opportunities in green energy and infrastructure-related companies could emerge.

I’m nearing retirement. How can I play catch up after last year? Should I delay retiring?

A: “Before you decide to change your retirement plans, take stock of where you are,” suggests David Koh, senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. “This has been a challenging environment for anyone approaching retirement,” he says. “And if you find you aren’t where you need to be in terms of having adequate savings to meet your goals, you may need to look at what you could change.” That could mean adjusting what you expect to spend during retirement, revisiting the level of risk in your portfolio or even deciding to work a bit longer.

Still, the current bond market offers potential advantages to those who are on the brink of retirement and need to generate substantial income, Koh says. “You may want to make sure you have adequate exposure to investments that can help you do that,” he adds. “But the most important thing now is to have an honest conversation with your financial advisor about the way forward.”