Investing in the stock market is more important than ever amid rising inflation

Prices are rising, squeezing consumer budgets more than they’ve seen in the last 40 years.

It also means that for many investors, it may be more important than ever to continue to put their long-term savings in the stock market.

That’s because over time, investing in equities is generally a good way to outrun inflation. For example, the average annual return of the S&P 500 Index is about 10%, higher than the 7.9% annual inflation seen in February.

“Historically, being invested in equities is really the only good way to stay ahead of inflation,” said Eric Henderson, president of the annuity business segment at Nationwide Financial. “Equities can be volatile but for the long run that has been a winning formula in the past.”

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Balance higher prices and savings

In the current environment, where Americans are grappling with higher inflation and rising interest rates, saving for the long-term can become more difficult.

The recent volatility seen in equities — spurred by the Fed hiking rates and the war in Ukraine — may have also unnerved some investors.

But experts recommend continuing to invest consistently, if possible, especially for those with longer time horizons.

“If you keep contributing to your retirement savings, you’ll always have more,” said Ed Slott, CPA and founder of Ed Slott and Company. He added that there are things that can help combat choppy markets, such as using dollar-cost averaging to put money into the market.

“It smooths out your contributions over time, so the impact of volatility is much less,” said Slott.

It also means refraining from cutting back on retirement savings if you can while other prices are going up.

“Take the long-term view, not the short-term view,” said Henderson. “Don’t overreact to short-term pressures.”

Time to rebalance and diversify

Of course, investing through volatile markets is not without risk. Still, there are things investors can do to protect and even improve their portfolios through market swings.

“Investing should always be a process over time, but when you’re in a high inflation environment and the Fed is aggressively tightening monetary policy, it is without a doubt a riskier time to be in equities,” said Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab.  

“That doesn’t mean you stay out by any means, but you have to be mindful of the disciplines that are important to help you navigate through what is generally a more volatile period of time,” she added.

That includes things such as diversification and rebalancing, she said. For instance, you want to have investments spread across sectors of assets including stocks, bonds and more.

Even within equities, you may want to rotate into areas that generally perform better in higher inflation, such as energy, industrials and some real estate stocks. Commodities and gold have also historically done well in high inflation, Sonders said.

Find the right risk profile for you

It’s also a good time for investors to gauge if their financial risk tolerance and emotional risk tolerance match — some people may have invested aggressively and then discover during a market downturn that their emotions get the best of them.

Finding the right balance is important to keep investing in the long term.

“If you want to build a nest egg, if you want to grow your money over time, you’re going to need to be invested in areas other than a savings account,” she said.

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