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

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

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

That’s because investing in stocks in general is a good way to escape inflation. For example, the average annual return for the S&P 500 Index is about 10%, ahead of February’s 7.9% annual inflation.

“In the past, investing in stocks was really the only good way to stay ahead of inflation,” said Eric Henderson, president of Fixed Income at Nationwide Financial. “Equities can be volatile, but over the long term this has been a recipe for success in the past.”

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Balance higher prices and savings

In the current environment, as Americans grapple with higher inflation and rising interest rates, long-term saving can become more difficult.

Recent volatility in equities – triggered by the Fed’s rate hikes and the war in Ukraine – may also have unsettled some investors.

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

“As you continue to contribute to your retirement savings, you 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, such as using dollar cost averaging to get money into the market.

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

It also means trying not to cut retirement savings while other prices are rising.

“Look at the long-term perspective, not the short-term,” Henderson said. “Don’t respond to short-term pressure.”

Time for a realignment and diversification

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

“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 undoubtedly riskier to invest in stocks,” said Liz Ann Sonders, managing director and Chief Investment Strategist at Charles Schwab.

“That doesn’t mean there’s no way you’re staying out, but you do need to be mindful of the disciplines that are important to navigating a generally more volatile time,” she added.

That includes things like diversification and rebalancing, she said. For example, you might want to spread investments across different asset sectors like stocks, bonds, and more.

Similarly, in stocks, you should move into areas that generally fare better in higher inflation, such as energy, industrials, and some real estate stocks. Commodities and gold have historically performed well even when inflation is high, 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 – some people may have invested aggressively and then find their emotions getting the better of them during a market downturn.

Finding the right balance is important to long-term investing.

“If you want to build a nest egg, if you want to grow your money over time, you have to invest in areas other than a savings account,” she said.

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https://www.cnbc.com/2022/03/22/why-high-inflation-makes-investing-in-the-stock-market-a-smart-move-.html Why high inflation makes investing in the stock market a smart move

Gary B. Graves

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