When Inflation Affects Investment Planning

03.24.23 | Personal Finance

 As if dealing with the current economic climate isn’t overwhelming enough, we also must deal with its impact on our future. Many are wondering how this period of higher inflation is affecting their investments and what they can do about it. However, the better question might be when to adjust one’s investments in response to it.

Inflation & a Bear Market

The economic hardships we currently face are a result of both rising inflation and a bear market. In 2022 we saw the S&P 500, NASDAQ, and the Dow Jones enter a bear market. Now in early 2023, markets have yet to recover.

There is a relationship between inflation and bear markets. Lavall Chichester explains that increasing inflation over the last few years has “affected interest rates, Fed policy, consumer spending, and corporate profits – helping to push the market back to bearish.”

Retiring Later (in 10+ years)

The stock market is often described as a roller coaster. The economy, including stocks, naturally rises and falls over time. Inflation plays into this. A recent moneywise.com article by Nicole Dieker expounds, “Even though the market may experience volatility on any given day, stocks — as a whole — tend to trend upward over the very long term.” So as long as you don’t bail on the roller coaster ride before it’s over, you’re less likely to suffer financially. The article continues, “you can mitigate the negative impacts of inflation through a diversified portfolio. The key here is twofold: investing wisely through diversified mutual funds and time. When the economy and stock market are down, the more time you have to ride it out, the better.

Therefore, if you’re not planning to retire for another ten years or more, you can take a deep breath. Your investments are already set up for times just like this. Dieker advises considering putting more toward your emergency fund to make your cash cushion a little thicker for these rainy days. However, she concludes, “The best advice on inflation may be to ride it out with your diverse investment strategy, avoid overspending, and keep focusing on your long-term financial goals.”


Simply put, if you don’t plan to retire soon, you may not need to make any investment changes. Just stay on the roller coaster.


Retiring Soon (in the next 10 years)

Those who plan to retire soon are facing a more challenging scenario. They’ve worked hard and made smart investments over the past twenty to thirty years. Their roller coaster ride is supposed to be coming to an end but it’s difficult to make their exit.

To put it into perspective, Sarah Hansen from Money.com breaks down the numbers: “A 30% hit to a portfolio worth $20,000 means a loss (on paper) of $6,000, whereas the same percentage drop on a portfolio worth $800,000 would wipe out a whopping $240,000.” The younger the investor, the smaller the loss and the more time they have to recover. Conversely, the older the investor, the greater the loss with little to no time to recover.

To hedge against risk of loss, it is common for investors to adopt a conservative investment strategy as retirement approaches. Investopedia.com describes a conservative investment strategy as having “risk tolerances ranging from low to moderate. As such, a conservative investment portfolio will have a larger proportion of low-risk, fixed-income investments and a smaller smattering of high-quality stocks or funds.”  In addition, or possibly instead of this strategy, there are other options for adjusting investments in response to high inflation.


Common Strategies to Adjust for Inflation

If possible, you may consider delaying retirement until the economy begins to recover. Sarah Hansen points out that “Delaying your retirement even by just a year or two could make a big difference when it comes to the value of your portfolio (not to mention the value of your Social Security benefits, if you can wait until age 70).” However, if you are not able to delay retirement, you will have to discover the appropriate strategy for adjusting your investment portfolio.




Personalized Wealth Management with Midwest Capital Advisors

None of the aforementioned strategies are guarantees, of course. Unfortunately, there’s no one-size-fits-all solution to hedging investments against inflation. For this reason, every investor needs a professional in their corner to walk them through their unique situation and help them make customized adjustments that will set them up for security in their golden years. At Midwest Capital Advisors, we build customized retirement plans around each individual and their goals. If you are concerned about how inflation is affecting your investments and need help learning what adjustments to make when, contact us to begin planning for a more confident financial future!

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