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What Should You Do About Inflation and Stock Market Volatility?
After a three-year rally, the S&P entered correction territory (down over 10%) in late January, marking the worst slide since 2020. The selloff has been especially extreme in many previously high-flying tech stocks. Over 70% of stocks in the NASDAQ index are down more than 20%, and the average stock in the tech-focused index is down 40%.
The Russian invasion of Ukraine furthered the market decline, as we all face the unfortunate reality that our world is not as safe as it often seems. From a purely financial perspective, we know that geopolitical events can impact investments, so we need to prepare for a wide range of outcomes, at least over the shorter term. For historical perspective, below is a table showing market reactions around past geopolitical events.
Even before the Russian invasion inflation has been causing concerns and may continue to be the key issue for our current market cycle. Because inflation is reaching 40-year highs, it is expected that the Federal Reserve will begin raising interest rates in the spring, which could potentially slow the economy.
Investors are understandably nervous about their investments and their purchasing power. If you are worried about your portfolio, you’re not alone. But during stock market volatility, it’s important to keep a level head to avoid financial mistakes.
Market Corrections are Normal
Investors could be forgiven for overreacting to recent stock market volatility. After all, last year was especially calm, with the S&P 500 Index’s largest decline just 5% and the market hitting all time highs on 70 separate occasions. That kind of steady, easy climb is an outlier in market history. A market that rises and falls is far more normal, and a good reminder to the underlying truth that there is no return without risk.
Let’s put current conditions into perspective. On average, declines of 10% or more happen about once a year, as seen in the table below. Even with significant losses throughout the year, the stock market still has a solid long term track record. And while we can’t make short term predictions, when there has been a correction of 10% or worse, 3 out of every 5 years have ended with a positive return.
Risk is the trade-off for Return
It is important to understand that risk is nothing new and stock market corrections are perfectly normal. In fact, risk is a necessary trade-off for earning a long-term return; it is what makes investing so difficult.
Let’s get this out of the way: the future is always uncertain. All the factors above are playing into market movements. The problem is nobody can know for certain the impact these risks will have on the economy. One thing that seems clear is that the period of “free” money provided by zero interest rates is ending. But many questions remain: such as how much will the Fed hike rates, and how will it impact inflation and the economy? The markets are pricing in many unknowns and given daily gyrations they are having a hard time doing it. As investors, we must accept these uncertainties as part of our long-term investment decisions.
Focus on What you Can Control
Market corrections can take a psychological toll on investors and increase the chances of making a mistake. It also means more opportunity to buy or rebalance at lower prices. If you’re saving money on a regular basis, corrections can be a good thing because it means you are buying stocks on sale. If you are in a draw-down phase, you ideally have built a portfolio with an understanding that corrections do happen and can still provide needed income without selling stocks into poor conditions.
It is impossible to know how long this correction may last. We aim to build portfolios that are durable in any market environment and prepare for corrections as part of a financial plan. The media can often make it seem like each negative episode is worse than the one before. Know that in the long term, volatility does not hurt investors. But selling when the market is down will lock in losses and can destroy a plan.
Remember That Your Portfolio Is Diversified
Fears about inflation, volatility, and market declines are stressful. However, it is important to keep in mind that while the stock market is down, your portfolio is made up multiple asset classes designed to work together to decrease overall losses. It won’t always work perfectly, in the short-term market corrections can impact many asset classes at once. But history has proven that over full market cycles having diversified portfolios can protect investors from something like the “lost decade” where large US stocks failed to provide any return for ten years following the late 1990’s bull market.
Review Your 401(k) and Other Accounts
Now is a good time to look at all your investment accounts, including your 401(k) to make sure it they are well diversified. If you have not rebalanced your other investment accounts in the last year, get in touch with our office and we are able to offer recommendations to minimize potential losses.
Speak With Your Advisor
Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third party. Human nature causes us all to act out of emotion when our accounts go down. We seek to serve as a support system for our clients, helping them make informed financial decisions that aren’t driven solely by emotion.
Remember that you are not alone. We hope you take comfort in knowing that our team at Windgate Wealth Management is here for you. We know the volatile markets, among other things, can cause you concern regarding your retirement plan. Let us help reduce any burden by calling (844) 377-4963 or emailing firstname.lastname@example.org. You can also book an appointment online here.