Inflation and the Market – What Every 401(k) Investor Needs to Know
The current economic and market environment uncertainty has a lot of investors nervous. And, rightfully, so. The market is ugly right now.
Listen or read the news, and it’s all doom and gloom.
While we are experiencing unpleasant market volatility, it’s important not to focus too much on the negative – as hard as it might be.
If we see the glass half empty and start to panic, we run the risk of making an irrational decision that may cause regret once the market recovers in time.
Though fear is a real and strong emotion, by looking past the current market action and considering the glass half full, we can avoid decisions of the heart that may cause more harm than good in the long run.
It’s easier said than done, so let’s take a quick look at historic data.
Inflation and the Market
Though there is the typical early market reaction to inflation and higher interest rates to fight it, the fact is that stocks have always been the best inflation hedge longer term.
The market has averaged about 9.4% a year since 1928, which greatly exceeds inflation measurements by 4 – 5%.
In fact, when you look at the 17 highest inflation years, the market was up 12 of those years and up double digits in 8 of the 17 years.
In the 5 highest inflation years, the market was up 4 of those years.
One of the reasons is that some percentage of inflation itself is corporations being able to pass along higher costs, which stabilizes their earnings. Ultimately, this has led to some of the strongest bull markets on record.
Watch Our Market Commentary for the End of Second Quarter
Avoid Emotional Decisions When Fear Runs High
Most of us went through 2007 – 2008 and even recently the pandemic sell-off, not to mention the early-century tech bubble, among other similar times.
In all cases, the market recovered given patience, and it will this time, too. It might not feel like it right now, but it will. What goes down must go up and vice versa.
If you are worried about your 401(k), the key is to remember stocks have always been the best inflation hedge longer term.
If you’re fighting the urge to move to cash or to stop contributing altogether – before you make a move – consider the historic data above.
Also, consider that down markets provide an opportunity to accumulate more for your retirement future.
Instead of panicking and wanting to move to cash, can you instead view this as the chance for you to increase your portfolio holdings?
If you saw this volatility as an opportunity, would you contribute more to your 401(k)?
Remember, sometimes the best decision is to do nothing because the market always turns.
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