Coping With Market Volatility and Inflation

Today’s market and economy are being influenced by factors nobody could have predicted—from a global pandemic to supply chain issues. As a result, we’ve seen increased market volatility and inflation. If you’re looking for strategies to protect your money against future uncertainty, your first line of defense should include a strong financial plan. 

Understanding How It All Works 

The market is affected by many different factors. Interest and tax rates, investor activity, current events, supply chain issues and even natural disasters are just some of the things that make a difference. So, when there’s a dramatic shift in one or more areas, it can trigger fluctuations. 

• Volatility. A volatile market changes unpredictably, and values of investments may rise or fall dramatically. If values are moving up or down more than normal, the market is said to be volatile.
• Inflation. Put simply, inflation is when prices go up for practically everything at the same time—or the rate at which they increase in a particular timeframe. That affects everyone’s buying power. For example, 25 years ago, you probably could have bought much more with $50 than you can today. Back then, a gallon of gas cost, on average, $1.23 a gallon. That’s not true today. 

That’s why for long-term goals like retirement and college, your funds need to be able to outpace inflation to stay on track. That’s why you need thoughtful financial planning.

Evaluating Possible Strategies

Creating a flexible long-term financial strategy with periodic review and tweaking can help with your goals overall. Here are a few strategies some investors have used successfully in their financial plans:

• Dollar-Cost Averaging. In general, you invest the same amount at regular intervals instead of trying to time when and how much you should invest based on market conditions. You’re likely to do better over the long term because you’ll be able to take advantage of market highs and lows. A couple examples of dollar-cost averaging are investing in your 401(k) or TSP. You contribute a set amount on a fixed schedule, and you’ll probably see growth over time—regardless of what may happen on individual days or weeks.
  
• Reexamining Overall Risk Tolerance and Asset Allocation. When the market fluctuates a lot or your life situation or goals change, your risk tolerance may change too. You may want to change how aggressively you invest and what percentage of your investing dollars you put in stocks, bonds, mutual funds and cash (asset allocation in type of investment and industry). 
  
• Portfolio Rebalancing. It’s important to evaluate your portfolio regularly to ensure you’re not too heavily invested in a particular sector or industry. That way, if there are losses in a particular area, it probably won’t have an outsized effect on your portfolio. You’ll likely find that while some of your investments have grown quickly, others grew more slowly. That means the percentages you planned for your asset mix may have changed. Do you ride out some fluctuations or make changes to your portfolio? An NFIS financial advisor can help you decide.