Stick to the Plan

Investing During Times Of High Inflation

BY DAVID KUBICEK

Inflation Impacts Investments

“In recent years, with spikes in inflation, we also have seen increases in interest rates on investments like savings accounts and short-term cash investments,” said Ryan Swartz, partner and managing director of Creative Planning. “The long-term risk of keeping up with the rising costs of goods and services could merit an increase of allocations to more stocks versus fixed income investments, depending on the situation.”

Inflation is a drag on investment returns, acting essentially like a tax, but over the long-term stocks tend to be good investments to protect against inflation, although not necessarily an “inflation hedge” over the short-term, according to Sonu Varghese, director of investment platforms at Carson Group.

“Companies can raise prices and maintain profit margins if inflation is higher,” he said. “So stocks are a ‘real asset’ in a sense, and longterm stock gains are one of the best ways to create wealth and beat inflation, [unlike] bonds, where the interest payments are nominal and can be worth a lot less in the face of inflation.”

Inflation tends to cause worry and anxiety for investors, creating a hesitancy to invest, which can put downward pressure on share prices, according to Ross Polking, lead advisor at Foster Group.

“Bond investing can be a bit more predictable,” he said. “Inflation tends to drive interest rates higher, thus dollars flow more heavily into fixed income instruments, while previously issued bonds will move inversely to the direction of interest rates. It’s important to remember that the market is always forward-looking. Anticipated inflation tends to be reflected in market prices before the actual inflation even rears its ugly head.”

Inflation initially impacts the economy, mainly the price consumers pay for goods and services.

“While our income is stable, dramatic increases in prices due to inflation means we tend to buy less, which ultimately affects the revenues of companies we buy from; therefore they become less attractive investments,” said Earl Johnson, wealth manager at EverGreen Capital Management. “[This] leads to lower stock market prices and less value of our investments.”

Investing Pitfalls

Many of the major pitfalls investors should avoid stem from letting emotions drive investment decisions in the short term. It is helpful to have a well thought out financial plan that you can use to tailor a longterm investment strategy to keep you on track.

“It is very tempting to let short-term market concerns dictate behavior,” Swartz said. “Markets are very unpredictable in the short term but become much more stable over the long run.”

Investors need to be diversified so that the impact of near-term volatility is minimized and matches their risk profile.

“At the same time, it’s important to remember that time is your best friend forever when it comes to investing,” Varghese said. “Patience pays: the longer your holding period, the more likely you are to see gains. The S&P 500 was higher 81% of the time every five years, 90% every decade, and it has never been lower if your holding period was 20, 25, or 30 years.”