The stock market is slipping. Should you go out
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With the news that inflation is accelerating faster than it has been in more than a decade, investors are nervous.
Because when the cost of living goes up, returns on investment need to go up so that people retain the same purchasing power. But they don’t always do that.
As a result, there is less left for investors.
“The risk is that if inflation rises it could gobble up whatever you deserve,” said Christine Benz, director of personal finance at Morningstar, recently.
The stocks already reflect investor concerns as the Dow Jones Industrial Average closed 681.50 points, or 2%, and the S&P 500 fell 2.1% on Wednesday.
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While inflation can be a real risk for investors, it’s too early to panic, said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
“Anyone who thinks they can see into the future is kidding,” said Boneparth.
The signs of what is to come are mixed, he said. For example, prices rose rapidly in April, but the job report for the month was largely unconvincing. The latter suggests that the economy may not be warming as much as some believe.
“It’s early to make changes,” he said.
Despite the recent declines, the market has been good for investors over the past year.
From January 2020 through the beginning of this month, the S&P 500 achieved an annual return of more than 20%, according to Morningstar Direct. A $ 10,000 investment would have grown to more than $ 13,000.
And while inflation can gobble up market returns, the damage isn’t as bad as you might think.
Between 1900 and 2017, the average annual stock return, according to calculations by Steve Hanke, Professor of Applied Economics at Johns Hopkins University in Baltimore, was around 11%. Adjusted for inflation, this average annual return is still 8%.
In general, financial advisors caution against making major changes to your investment strategy based on news headlines or an event.
“For longer-term investors, we recommend staying on course if they can,” said Rob Williams, vice president of financial planning at Charles Schwab.
It pays off.
Over the past 20 years, the S&P 500 has achieved an average annual return of around 6%. However, if you missed the best 20 days in the market during that period because you were convinced you should sell and invest again later, your return would shrink to 0.1%.
Bouts of market volatility, as uncomfortable as they are, are to be expected, said Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.
“Pain is a sign that you are investing well,” said Roth.