What Should You Do About Inflation and Volatility?

by | Feb 7, 2022 | Investments, Retirement Planning

What Should You Do About Inflation and Volatility?

This is an important reminder that stock market volatility is a feature, not a bug. For a second there, it felt like we were past the big swings, and notched a bottom on January 27. The S&P nearly hit the down 10% point, which we informally consider a correction.

In addition to the stock market decline, inflation has been causing concerns. Because inflation is reaching 40-year highs, analysts expect that the Federal Reserve will begin raising interest rates in the spring, with some anticipating rates could rise even sooner. Right now, the effective Fed Funds Rate is 0.08%.

Investors are understandably nervous about their investments and their purchasing power. If you’re worried about your portfolio, you’re not alone. But during stock market volatility, it’s important to keep a level head to avoid financial mistakes.

Stay calm.

At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble, and it won’t be the last. Declines in the Dow Jones Industrial Average are actually fairly regular events. In fact, drops of 10% or more happen about once a year on average:

decline and duration chart link copy

Ride out the uncertainty storm.

Markets dislike uncertainty. Currently, there’s a lot of uncertainty around the ongoing coronavirus pandemic, inflation, interest rate hikes, tensions between Russia and Ukraine, and the earnings reports due out for several large technology companies. Uncertainty is always present, however. After all, investing in the stock market is about the future.

With so much uncertainty, volatility right now is up, but in no way extreme. The VIX, or the market volatility index (A.K.A. the fear index), is at the highest level in nearly a year.

There has been one major, extreme spike, in the last three years. That was the Covid panic in March 2020. Of course, hindsight is 20/20, but more often than not, when the Fear Index spikes, there are good investing opportunities present, sometimes hiding in plain sight.

SP volatility index

SP volatility index

Play dead.

There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction. We don’t know yet whether Fed actions, inflation, or the global macro concern du jour, will lead to a recession or a bear market, but that risk is always present.

Market volatility has increased in recent years, and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses.

The value of a diversified portfolio.

Fears about inflation, volatility, and market declines are stressful. However, it’s important to keep in mind that while the stock market is down, your portfolio is diversified, and made up of stocks, bonds, and other assets that are designed to work together. It’s also important to consider your specific allocation, investment horizon, and financial plan when reflecting on economic events. And if you have questions about your portfolio, please get in touch with our office.

Being balanced and diversified is a volatility reducer. To illustrate, the blue line in the chart below reflects how a balanced portfolio performed over the past 35 years, which included several periods of extreme market turbulence.

volatility reducer

volatility reducer

Review your 401(k) and other accounts.

Now is a good time to take a look at all of your investment accounts, including your 401(k), to make sure it’s well diversified. If you have not rebalanced your investment accounts in the last year, get in touch with our office, and we’ll take a look and offer recommendations to ensure that you’re invested in accordance with your goals.

Speak with your adviser.

Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third party. Human nature causes us all to act out of emotion when our accounts start dropping. As an independent, fiduciary firm, we put your best interests first. We seek to serve as a support system for our clients, helping them make informed financial decisions that aren’t driven by emotion.

We’re here for your friends and family, too.

If you have friends or family who need help with their investments, we’re happy to offer a complimentary portfolio review and assessment. We can discuss what’s appropriate for their immediate needs and long-term goals. Sometimes simply speaking with a financial advisor can help investors feel more confident and less concerned with day-to-day market volatility. To schedule a free consultation, use the button below.

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