Inflation & Volatility

Are you concerned about inflation?

This is a question I'm often getting, and inflation is dominating the discourse right now. It's driving the headlines being talked about hourly and wreaking havoc on budgets. We're paying more at the pump, for food, housing, and just about everything else. But for long-term investors, short-term inflation isn't the biggest risk to their financial plans. The biggest risk is actually volatility.

Volatile markets are equal parts stressful and suspenseful. And the volatility right now is being fueled by the Federal Reserve's efforts to balance bringing down inflation with minimizing the impact of a potential recession. The Fed is raising the key short-term interest rates to slow economic growth. This makes money more expensive, which in turn puts a damper on the individual and corporate appetite to borrow money. But as rates rise, uncertainty creeps in. So does volatility. And while markets may be rational, investors typically are not. But there are a few things you can do to combat what's happening right now.

First off, despite volatility, you need to likely keep saving, particularly for your long-term goals like education, retirement, or healthcare, whether it's a 529 plan for your kid's college, 401k, IRA for retirement, or health savings accounts for your health expenses. These types of savings are tax-advantaged. So, you aren't just putting money away. You're lowering your taxable income and taxes in a year. You make contributions.

Second, diversification matters more than ever. This isn't ending anytime soon, unfortunately. So, choosing sectors and asset classes that can keep up with inflation will put you in a stronger position. And while inflation may be outpacing the income generated by the bond portion of your portfolio. Remember that bonds typically have a role in planning and reducing your portfolio's ups and downs.

Right now, it may be painful to look at statement balances. This bear market cycle may not be as quick as the 2020 cycle since the Federal Reserve is no longer supporting the markets. History shows that bear and bull markets come and go. Persistence is typically rewarded. Volatility is uncomfortable for anyone. There's a reason that the index that measures market volatility, the VIX, is called the fear index, but that doesn't mean you should succumb to it. Take stock of where you are, make changes to daily living expenses to stay within your budget, and tune up your portfolio only where necessary.

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