If watching the financial news lately has you feeling a little uncertain about your future, you’re not alone. It’s perfectly understandable that you might be wondering if your financial plan can withstand the ups and downs of the market.
I entered the financial planning business in 1986, just after the high inflationary period of the late 1970s and early ‘80s. I witnessed the government rapidly and dramatically raise interest rates in 1981 and 1982 to stop inflation, which ended up causing a recession.
Inflation can lead to high interest rates, which can be good for savers but also make it more expensive to borrow money for things like owning a home. As inflation got under control, and the economy emerged from the recession, I was fortunate enough to experience one of the longest running bull markets in history.
Bottom line? I learned not to panic during these temporary unsettling events, that financial markets and the economy run in cycles, and that discipline and patience as an investor will eventually be rewarded.
But how can you get through this moment of uncertainty?
The top three questions I’m hearing from my clients are these:
- Will my portfolio decline in value?
- Will my purchasing power be negatively impacted by inflation?
- Should I buy gold or go to cash?
According to an analysis performed by the U.S. Bank Asset Management Group, stocks have held up well against inflation over the last 30 years. (2) In theory, a company’s revenues and earnings should increase at a similar pace as inflation. This means the price of your stocks should rise along with the general prices of consumer and producer goods.
In the past 30 years, U.S. stocks have tended to rise in price somewhat when inflation is accelerating, though the relationship is not particularly strong. On average, stock returns have historically been positive over the first two years of the Fed tightening cycles.
Here are two things to remember:
- More important than the direction of policy is the state of the economy.
- When the Fed is removing stimulus because the economy is on solid footing and there is no recession, stocks tend to do very well.
This might make you sleep better at night.
When you’re watching the news, remember that they’re focusing on the immediate picture while most investors are looking long term. Whenever clients are making a significant investment decision, we encourage them to ask, “How will I view this move not over the next five days but over the next five years?” This can really help in making sound decisions that lead to better investment outcomes.
Volatility is part of investing and there’s really no way around it. To benefit from the strong return equity markets have historically provided, one must be willing to tolerate declines. The key is to be aware of risk in advance and build portfolios accordingly. Warren Buffett has called this process weathering market declines while attempting to avoid a permanent loss of capital.
We understand that some of this sounds good in theory, but it’s also important to know how what’s happening is affecting you personally. We are still in the middle of uncertainty and change just like we were two years ago. We made it through it then and while the path and the timing will be different this time, we will make it through again. However, if you have questions about your own financial future, we’re here to help. CLICK HERE to make an appointment.
Check out the next articles in this series on inflation:
- Don’t Make the Mistake of Being a Single-Issue Investor
- What Assets do Well in an Inflationary Environment?