For Jill, who has worked hard and saved for years, having a secure retirement and maintaining the purchasing power of her savings is a top priority. Jill is concerned about the best place to put her money and what changes she should make to their stock market investments during this high inflation period. Jill worries that their savings may not be enough to sustain them throughout retirement in a way they are accustomed to. Should they drastically alter their portfolio to combat inflation? Or do they need to extend their working years? These are some of the questions plaguing Jill and others in a similar situation.
Inflation
Inflation is when the value of money decreases over time, making it harder to buy goods and services with the same amount of money. This decrease in purchasing power happens when prices for goods and services rise faster than wages, salaries, or retirement distributions. Inflation can reduce our standard of living if we don’t have a plan to manage it.
Historical Performance
The S&P 500 index broadly measures the U.S. stock market, comprising 500 large publicly traded companies. It is commonly used to gauge the overall performance of the stock market. Conversely, inflation represents the rate at which the general level of prices for goods and services rises, eroding purchasing power. Long term, the stock market is an excellent hedge against inflation. Historically, stocks have outperformed inflation 71% of the time since 1950, meaning investing in the stock market has been a great way to protect against rising prices. Additionally, the stock market can offer diversification. With a long-term approach, investing in the stock market is an effective way of protecting and growing your wealth, even during times with higher than expected inflation.
Correlations and Patterns
Over the post-1950 period, there has been a mixed relationship between inflation and the stock market. In some periods, the stock market and inflation have exhibited positive correlations; in others, they have displayed negative or no significant correlations. It is important to note that correlation does not imply causation.
Positive Correlation
In the 1970s and early 1980s, there was a special connection between inflation and the stock market. Several factors can explain this. When there’s high inflation, companies can generate more revenue and profits, especially if they can transfer the increased costs to their consumers. Moreover, inflation diminishes the value of cash holdings, encouraging investors to look for other options like stocks.
Negative or No Correlation
During specific periods, such as the late 1990s and early 2000s, there wasn’t a significant correlation between inflation and the stock market. This could be attributed to various factors, such as shifts in monetary policy, economic conditions, or investor sentiment. For instance, when inflation is low, the Federal Reserve may implement accommodating monetary policies to encourage economic growth and bolster stock prices.
2022 was an Unusual Case
In 2022, the stock market (S&P 500) showed a disappointing return of -18.1%, while inflation was 6.5%. This has only happened 29% of the time since 1950. However, it’s worth noting that during this same period, the stock market still had a return of 11.2% before inflation and a respectable 7.5% after inflation was considered. The critical takeaway is to remain steadfast in your stock investing strategy.
Why Should You Invest in the Stock Market Despite Inflation?
Investing in the stock market is still one of the best strategies to protect against inflation and ensure that your savings maintain their purchasing power. Stocks have outperformed inflation 71% of the time since 1950, making it a great way to safeguard your wealth. Additionally, diversifying across different asset classes can help hedge against inflationary pressures elsewhere in the economy. With a long-term approach and patience, investing in the stock market can effectively protect your savings against rising prices. So don’t let inflation get you down. The good news is history shows us you can preserve your wealth by investing in the stock market.
Long-Term Investment Strategy: Stay patient and stay invested for long-term gains
At Stalwart Financial Planning, we understand the importance of investing for the long term and staying patient with your returns. Investing in the stock market is still one of the best strategies to protect against inflation and ensure that your savings maintain their purchasing power. We recommend keeping a diversified portfolio comprising stocks, bonds, cash, real estate, and other assets. In addition, our experienced financial advisors can provide guidance and advice to help you make informed decisions about your investments in the stock market.
Lessons to Takeaway
The stock market is still a great hedge against inflation, with stocks outperforming inflation 71% of the time since 1950. Diversifying across different asset classes can help you protect your wealth against rising prices. However, taking a long-term approach and being patient with your returns is essential. With the right strategy and advice from experienced financial advisors, investing in the stock market is an effective tool for safeguarding your savings from inflation. Investing in the stock market can help you protect against inflation and greatly assist in having your hard-earned money maintain its purchasing power. At Stalwart Financial Planning, we are here to help guide you through every step of the investment process. Contact us today to learn how we can help you protect your wealth against inflation.
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.