Current inflation and the stock market volatility

From Retirement Now Newsletter 1-27-2022

Stock market volatility and inflation are probably two of the biggest topics retirees are hearing about right now.

I’ve had my fair share of discussions with people talking about how much a foot long sub at Subway has increased from what it used to be just a year or two ago. I now will grab a coupon from the weekly newspaper before grabbing some fast food. I probably should have been doing this effortless act anyway before the price increases.

Concerning the stock market…

As of writing this newsletter, the S&P over the past month is down about 7%.

That’s not the whole story. There are other stocks in addition to those inside the S&P.

Looking at some international indexes of developed and developing countries they are only down about 2%. And some commodities, like gold, are up approximately 1%.

These numbers of course change daily, and no investor should base their investment decisions on short-term information alone.

The point being, not everything moves to together in lock-step.

And concerning inflation… Equities are generally touted as a good inflation hedge over the long-term. And I agree with that.

Over the short-term markets will fluctuate, even go down.

But over the long-term equities have been a good way to not only grow money, but also outpace inflation and taxes.

But this can be hard for an investor to get this type of growth because the ride can be bumpy along the way and it’s very normal to want to get off the roller coaster after it’s already gone down.

Especially for retirees and soon-to-be retirees.

The solution?

Start with a plan for your retirement. This includes estimating the level of spending you need in retirement, and of course assuming an inflation rate going forward for the next 20-30 years. Let the plan  guide you on what type of diversified investment portfolio you need to achieve the long-term growth. Then keep that diversified portfolio in balance over time, which may require re-balancing on a yearly basis.

Let the plan guide you on when you need to adjust your investments, not short-term market changes.

One other interesting thing to note that you might find useful as you’re planning your retirement:

All of the safe withdrawal studies that I’ve read use historical stock and bond market data to determine how much a person can withdraw from a portfolio without it fully depleting after a time period, usually a 30-year time period.

The studies show that to sustain even the industry hallowed figure of 4% starting out, then increase it each year to keep pace with inflation, the investor has to consistently be invested in equities.

And these studies simulated the high inflation period of the late 70’s and early 80’s. As well as the 1930’s depression era period.

By sticking to a consistent investment portfolio with enough equity exposure, the portfolio was able to sustain the 4% withdrawal.

I hope this week’s newsletter has helped you as you are planning for your retirement.