As we continue to deal with record-high inflation and economic instability, you might be wondering how you should manage your investments. It can feel disheartening to check on your portfolio and see poor returns, but don’t panic; we’ll cover why it’s better to weather the turbulent times to get the long-term rewards.
Historically speaking, stocks have done well over time, even during periods of high inflation. What does that mean for your portfolio? Here are some insights from the past that might help with your current, and future, investments:
Stocks Performance During Inflation
As of May 2022, the inflation rate sat at 8.6% – the highest it’s been in 40 years. That might signal that this is a good time to invest in stocks. According to a study on market performance by The Leuthold Group, stocks don’t just survive during periods of high inflation; they thrive. Since 1945, stocks have tended to perform very well just after the inflation rate peaks.
Why is that? Most likely, it’s because once inflation rates start to fall again, people see it as a buying opportunity. This additional cash in the markets boosts stocks for a while, until the inflation rate gets closer to normal.
Stocks Weather Down Economies
Both the markets and the economy will experience low points. That’s why it’s so important to have a well-balanced portfolio. We know that recessions are coming, so build a portfolio that can handle them.
A report from Dimensional showed that, since 1926, the stock market has had positive returns in 75% of the years listed. Additionally, more than two-thirds of down years were followed by an up year, showing the resilience of stocks over time.
So if you’re feeling dismayed at the state of your returns, oftentimes it just takes a couple years for things to climb back up again.
How to Invest During Down Times
Even if you know logically that the down times don’t last, it’s human to get nervous when your portfolio decreases. But knee-jerk reactions rarely ever pay off in the stock market. Here are some things you can do to manage your investments (and your emotions,) even when the markets are rocky:
- Remember that every market downturn of more than 15% since 1929 has led to a significant recovery. On average, the return for the first year after these declines was 55%.
- Look at the full picture of your investments, not just short-term gains and losses. The way you set up your portfolio should reflect your risk tolerance and goals, and be revisited once or twice annually to make sure it’s still on track.
- Consider dollar cost averaging, which is where a fixed amount of money is invested regularly, regardless of what the markets are doing. This helps investors to continue with a set investment plan, without quick, emotional decisions that could backfire.
- Diversify. Different asset classes are up at different times. Having a good mix of all of them ensures that something is almost always performing well.
The Bottom Line
The markets will have down times, but the investors who focus on the long term and time spent in the market typically do best. Stocks can help your portfolio perform well, even during market downturns or economic declines.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.