How Inflation Impacts Investments

Inflation is a topic that can’t be avoided right now. It’s dominating conversations, garnering significant news coverage, and influencing financial policy at the federal level. Generally viewed as a villain, inflation is often misunderstood and frequently overcomplicated. 

But, when you get right down to it, inflation is simply a price adjustment — one that essentially removes the current price tag on an item and replaces it with a more expensive one. The big question, though, is how inflation impacts investments. 

It’s common for those who already invest, or for those who are on the fence about it, to wonder if it’s a good idea to enter the market during an inflationary period. Put simply, it is.

Investing in the market is the only way to outpace inflation. 

As consumers pay more for the same items — a hallmark of inflation — the value of the same dollar used to purchase those items decreases. Take one lap around the grocery store and you’ll see the obvious impact of inflation as prices on everything from ground beef to packaged foods to paper products have increased quickly and significantly.

During an inflationary period, your dollar just doesn’t go as far as it used to. 

Analysts who pay attention to financial trends predicted the current inflationary period, in part because the financial system has its own cycles and in part, because the disbursement of hundreds of millions of dollars in government aid during the COVID-19 pandemic undervalued the dollar.

So, when you crunch the numbers, those who leave their cash in the bank during this current period of inflation could stand to lose 8% in value, on average. But, those who take the time to look for smart investment options that fit their risk level find ways to maintain the value of their portfolio. 

Risk is the key concept, and at Rosevest Financial, we believe it’s critical to maintaining comfort and confidence while investing, even during periods that are described as uneasy or volatile. The riskiest investment move to make during a period of inflation is deciding not to invest. 

Pundits and cable news experts are constantly bombarding viewers with new and sometimes contradictory investment advice, in part because the market is consistently in flux. Change is the one reliable factor. 

But, what those TV experts don’t take into account is an investor’s level of risk. When investors buy into companies with lengthy track records of growth, even if that growth is modest, it lowers the investment risk factor while still capitalizing on opportunities for gains. 

Even a modest, 3% growth rate — over time — will prove more beneficial than sitting on the sidelines as the value of cash decreases.

Investments are anchored by the long view. They ebb and flow with market cycles and corrections, which can sometimes inspire an emotional roller coaster for investors. But one of the best ways to measure the viability of an investment is to consider if a certain company will still be around in 10 or 20 years. 

It’s that foresight, patience, and discipline that will outlast any temporary period of inflation. 

Everyone’s needs are unique. Contact us so we can answer your questions and discuss your specific investment needs.