Strategies to protect your goals from consistent inflation
If you’re like most investors, you’ve noticed the impact of higher inflation in recent years – whether at the gas pump or the grocery store. American investors are experiencing the effects of prolonged inflation for the first time since the early 1980s.
As a result, many are concerned about how inflation levels will impact their ability to reach their long-term financial goals. While it may not be possible to avoid the effects of inflation altogether, there are several strategies investors can utilize to mitigate the impact of inflation on their financial plan. Here are three investment considerations that may help address inflation concerns and better prepare your goals for long-term success.
1) Keep your money invested
When the inflation rate soared in 2022, stock and bond markets declined. Some investors responded by pulling money out of the market. This can be counterproductive as investors too often miss much of a market’s recovery gain before they put their money back to work.
For example, the U.S. stock market (as measured by the Standard & Poor’s 500 stock index, an unmanaged index of stocks often used as a benchmark of market performance), declined 25% between January and October 2022. But by the end of 2023, the S&P 500 regained nearly all of the ground lost in the bear market.
It is normal for markets to go through ups and downs. Investors that stay the course and keep their money
invested commonly see their investments make up gains that were lost in a sudden downturn. While it may be tempting to remove yourself from the market during volatile periods, it could be helpful to stay invested at a level that reflects your risk tolerance.
2) If time is on your side, take advantage of stocks
Over time, stocks have historically outpaced inflation, an important consideration as you try to build wealth to achieve your ultimate financial goals with more confidence. This doesn’t mean that year-in, year-out, stocks will keep you ahead of inflation. 2022 is a good example of a year when stocks declined as inflation rose. But if you have time to let your money work for you, stocks have historically outpaced the rise in living costs.
According to data collected since 1871, stocks have grown faster than inflation for holding periods of 20 years or more. Investors who can ride the highs and lows of markets are often better suited to keep up, if not pass, the rate of inflation.
3) For short-term money, seek higher yields
For short-term money, discuss with your advisor the importance of liquidity and appropriate risk. If you have cash set aside for near-term needs, you may want to review whether your current savings approach is keeping pace with inflation and what tradeoffs come with seeking higher yields. Together, you can compare short-term cash options based on safety, access, fees, taxes and timing so your dollars stay available when you need them.
Whether an economic cycle brings conventional or elevated inflation it should be considered as a factor of your long-term financial plan. A financial advisor can help develop a comprehensive strategy that addresses the inflation environment today and over the long term.
Editor’s note: Madeline Orbin, CFP, AAMS, APMA, is a financial advisor with Small Wealth Management, a financial advisory practice of Ameriprise Financial Services LLC in Little Rock. The opinions expressed are those of the author.