Inflation and the Market: What Every 401(k) Investor Needs to Know

Inflation and the Market: What Every 401(k) Investor Needs to Know

What is inflation? Inflation is when the cost of producing or offering goods and services increases, while the purchasing power of money decreases. 

The COVID-19 pandemic and the Russia-Ukraine conflict are major factors contributing to inflation. With a shortage of workers in the supply chain, increased costs for importing and exporting goods, fewer consumers shopping and dining out, and increased costs for labor and fuel, the cost to live has significantly increased for many, causing families to struggle to pay for everyday necessities.

Inflation also affects investments, including retirement plans, bonds, real estate property value and certificates of deposit (CDs). It’s important to understand how inflation affects the market, and what to do (and not to do), to manage your finances.

Read on to learn how to prepare for the looming recession that pairs with soaring inflation, and how to avoid emotional decisions and plan for the future.

Preparing Your Finances for a Recession

As talk of another recession loom, you may be concerned about paying bills, earning enough money, and saving for your future. A few ways you can prepare include:

  • Reviewing your finances and adjusting your budget
  • Paying down debt
  • Start or enhance an emergency fund to pay for the unexpected
  • Diversity investments to include both low and high-risk strategies

Recessions can be concerning, but if you’re prepared financially before they happen, you can minimize financial stress.  Learn more about preparing for a recession on the Slavic401k blog.

Inflation and the Market

When inflation increases, so does the fear of how it affects the market. According to Investopedia, historical trends point to stocks being safer from inflation than other, riskier, investments due to the fact that as a company’s revenues and profits grow during an inflationary period. Due to the increased prices for goods and services, the market will stabilize and balance after a period of adjustment.

However, inflation may also cause enhanced volatility and risk in the market, depending on the type of stock it is, such as growth or value stocks.

For context, 401(k) Maneuver states that the market was up for four out of the top five highest inflation years,  – proving that stocks are a reliable inflation hedge for long-term investment strategies.

Avoid Emotional Decisions

As inflation continues to reach all-time highs, fight the urge to withdraw your money and transfer it to cash accounts. Not only will you face hefty early-withdrawal penalties, but you’ll also owe taxes on the funds you take out – not ideal for an economy experiencing a steadily decreasing downturn.

Instead, you should safeguard your retirement savings by following a bear market strategy. A bear market is defined by Nerdwallet as a plummet in investment prices, causing the market index to fall. As it hits rock bottom, causing a decrease in stock prices, investors will start purchasing stocks at a lower cost, which inevitably resuscitates the market over time, making investments more profitable.

It’s important to remember that the market is a volatile place, and while it ebbs and flows in relation to economic upturns and downturns, it always recovers.

For more financial education and economic updates, subscribe to the Slavic401k blog.

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