Your Portfolio During Volatility and Inflation

Written By: Nick Ziarek, CFP® , CFA

After markets set record highs the first few days of 2022, they have been on a steady decline. The new year ushered in a renewed focus on inflation. The government’s most common inflation measure is the Consumer Price Index (CPI) which pushed through 7% in January and hit 7.87% in February. Even the Federal Reserve’s preferred inflation measure of Core CPI, which excludes the more volatile food and energy sectors, climbed north of 6%. It was impossible to avoid headlines declaring inflation at its highest levels in over 40 years.

Markets were undoubtedly nervous with the Russian attacks on Ukraine which further increased concerns and constrained the already tight supply of commodities. Markets continued to decline while processing the long-term effects of inflation, rising interest rates and the unknown of the global geopolitical risks.

It is during periods of stress that investors begin to ask questions. The daily onslaught of worrisome headlines and doomsday prognosticators who sense their moment to shine can be too much to overcome. The question becomes, ‘Should I be doing something different with my portfolio?’.

The reality is that question is just a reworded version of the classic belief in market timing. Given what we know today, should you sell and wait for a more favorable outlook. This requires you to be right not just once, but twice. First, knowing that now is the right time to sell and that markets will continue to decline; second, being able to identify all is clear and it is safe to buy back in.

Sounds easy but if we look back to March 2020 when markets were rocked by global shutdowns from the COVID pandemic, no one knew that March 23^rd would be the bottom. Stay at home orders in the U.S. were just starting, there was no timeline for a vaccine and we knew almost nothing about the virus.  The day-to-day was getting darker yet markets started climbing. The S&P 500 has more than doubled since that day.

Investor Psychology

Many investors have unfulfilled expectations. They are looking for a better solution, one that can lead to a better investment experience. What would that approach look like? How can they improve their odds of success?

Let’s begin by considering what you want to accomplish as an investor. Why do people invest at all? People have different financial needs and goals, and therefore they may invest for different reasons. One major reason is to grow their wealth—for example, in preparation for retirement.

Whatever the reason for accumulating money, there’s another concern that creates the need to invest: the threat of inflation. Inflation erodes the real purchasing power of your wealth. As the value of a dollar declines over time, you invest to grow wealth and preserve purchasing power.

The most common approach to investing is based on prediction and forecasting. Methods include picking stocks expected to perform well in the future, moving in and out of industry sectors or attempting to time the market. This conventional approach assumes that someone has a crystal ball.  But a prediction about an uncertain future is just an opinion, and it should not determine one’s investment decision.

Long-Term Solution

To have a better investment experience, clients should focus on the things they can control.

It starts with Shakespeare creating an investment plan based on market principles guided by financial science and tailored to your specific needs and goals. Along the way, we can help you focus on actions that add investment value, such as maintaining broad diversification, regular rebalancing, managing expenses and portfolio turnover and tax loss harvesting.

Equally important, we can provide knowledge and encouragement to ensure you stay disciplined through various market conditions.