By Jonathan Freeman, CFP®, CFA, CIMA®

With a new year often comes many new resolutions related to healthy living and self-betterment. Maybe you’ve resolved to eat more fruits and vegetables, work out or drink more water.

No matter what “healthier” looks like for you in 2022, don’t neglect your financial health. If you don’t put the proper habits in place, you could find your financial health greatly impacted by impending market changes. Here are some practical tips that could help you stay financially healthy this coming year.

1. Pay Off Variable Debt

As the rising inflation rate suggests, interest rates will likely also increase in 2022. That means that if you have a pile of outstanding debt, you’ll pay more in interest this year than in years past.

How can you avoid incurring consequences from these increasing interest rates? By paying off variable debt or locking your debt in at a fixed rate. Variable interest rates, unlike fixed rates, fluctuate based on market interest rates. By paying off variable debt and locking in at fixed rates, you protect yourself from possible interest rate volatility in 2022.

2. Modify Your Expectations

Investment returns may be different this year than what we’ve seen in the past decade. It’s imperative to shift expectations surrounding investment performance. Over the past few years, we’ve seen elevated returns due, in part, to changes in fiscal and monetary policy. Many of those policies will expire in 2022.

Though it’s unlikely the present bull market will end immediately after the discontinuation of those policies, the change could slow the economy and cause a market downturn. Over the past 10 years, S&P 500 returns have been as high as 16.6% per year, but these high returns are most likely not sustainable far into the future. The changing fiscal and monetary policies, potential for rising rates, and high current market valuations all point to the possibility of lower returns in the coming years, calling for a slight modification of expectations.

Those who are retired and have gotten into the habit of spending a high percentage of their portfolio may consider adjusting their withdrawal rate to a lower percentage of their portfolio value.

3. Diversify Your Portfolio

S&P 500 Sector Weights

Because the S&P 500 has exceeded the historical average over the past 10 years, it is tempting for some investors only to buy the large-cap domestic stocks overrepresented on the index. However, as we mentioned, it is unlikely that these high returns will continue to the same degree.

To diversify, it might be beneficial to invest in asset classes with less weight than large-cap stocks like technology.

P/E Forward IndexAnother diversification tactic is adding some international exposure to your portfolio. International stocks with lower PEs indicate they are less expensive compared to their returns.

Investors also should consider alternative investment strategies other than bonds, as low-yielding bonds are unlikely to offer significant returns in the coming years.

4. Deleverage Your Assets

As the Fed continues to fight inflation in 2022, the economy could see a major slowdown as early as next year. That makes it a good time to deleverage your assets (get rid of some) and refrain from taking on new debt. Deleveraging cuts financial risk by eliminating liabilities. The most practical way to do this is by selling assets such as stocks and bonds, decreasing debt. We recommend talking to your financial advisor before you do anything.

Becoming financially healthy can become a sustainable part of your lifestyle when you form the right habits. If you would like to talk about your financial picture, please reach out to one of our advisors at Stonebridge Financial Group for assistance.