Why high inflation makes investing in the stock market a smart move

Chris Ryan | fake images

Prices are rising, squeezing consumer budgets more than they have seen in the last 40 years.

It also means that for many investors, it may be more important than ever to continue to put their long-term savings into the stock market.

This is because, over time, investing in stocks is often a good way to beat inflation. For example, the average annual return of the S&P 500 index is around 10%, higher than the 7.9% annual inflation seen in February.

“Historically, investing in stocks is really the only good way to get ahead of inflation,” said Eric Henderson, president of Nationwide Financial’s annuities business segment. “Stocks can be volatile, but long-term that has been a winning formula in the past.”

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Balance higher prices and savings

In today’s environment, with Americans facing higher inflation and rising interest rates, saving for the long term can become more difficult.

The recent volatility seen in stocks, fueled by the Fed’s rate hike and the war in Ukraine, may also have unnerved some investors.

But experts recommend continuing to invest consistently if possible, especially for those with longer time horizons.

“If you continue to contribute to your retirement savings, you will always have more,” said Ed Slott, CPA and founder of Ed Slott and Company. He added that there are things that can help combat choppy markets, like using dollar cost averaging to put money into the market.

“It smoothes out your contributions over time, so the impact of volatility is much less,” Slott said.

It also means refraining from cutting retirement savings if you can while other prices are rising.

“Take the long view, not the short view,” Henderson said. “Don’t overreact to short-term pressures.”

Time to rebalance and diversify

Of course, investing through volatile markets is not without risk. Still, there are things investors can do to protect and even enhance their portfolios through market swings.

“Investing should always be a process over time, but when you’re in a high inflation environment and the Fed is aggressively tightening monetary policy, it’s certainly a riskier time to be in stocks,” said Liz Ann Sonders. , CEO. and chief investment strategist at Charles Schwab.

“That doesn’t mean you’re left out by any means, but you do need to be mindful of the disciplines that are important to help you navigate through what is typically a more volatile time period,” he added.

That includes things like diversification and rebalancing, he said. For example, you want to have investments spread across asset sectors, including stocks, bonds, and more.

Even within stocks, you may want to rotate into areas that generally do better in higher inflation, such as energy, industrials, and some real estate stocks. Historically, commodities and gold have also done well in high inflation, Sonders said.

Find the right risk profile for you

It’s also a good time for investors to assess whether their financial risk tolerance and emotional risk tolerance match up: Some people may have invested aggressively and then find during a market downturn that their emotions get the best of them.

Finding the right balance is important to continue investing for the long term.

“If you want to build a nest egg, if you want to grow your money over time, you’re going to need to invest in other areas besides a savings account,” he said.

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