Feeling the pinch?
Well, I believe nobody said it better than Bob Marley
“Don’t worry, bout a thing…
‘Cuz every little thing gonna be alright”
I get it!
It takes twice as much to fill up your gas tank as it did a year ago.
There is sticker shock on every shelf in the supermarket.
The Federal Reserve Chair tells you to expect “some pain” in the future.
And retirement seems like an unattainable dream.
The Panic Inducing Headlines Are Everywhere:
U.S. inflation reached a new 40-year high causing Fed to Increase the Funds Rate
Inflation rose 9.1% in June, even more than expected… – CNBC
U.S. inflation at 9.1 percent, a record high | PBS NewsHour
We are all “feeling the pinch” right now.
This is in no way the first time we have gone through periods of high inflation, potential recession, and “some pain” in the future.
Human nature hasn’t changed much in the history of humankind. Our natural tendency in these times is to… PANIC!
This panic leads to mistakes. As the cyclical nature of our financial world continues to repeat and repeat and REPEAT, our collective herd-like mistakes tend to go hand in hand.
What should you do as an investor to prevent these same mistakes from destroying your financial future when you are once again… “feeling the pinch?”
Don’t Panic Because You Are Feeling the Pinch
We are all hitchhikers in the financial galaxy. And just like the overwhelmingly complicated guidebook with the words “DON’T PANIC!” adorned on its cover, you should not panic when seeing the headlines and feeling the pinch in your portfolio.
If you are a long-term investor in your company’s 401k, you most likely had a sense of grief when you opened your most recent statement. You are already feeling the pinch in your wallet and getting sticker shock everywhere you turn. Now this?!
It is tough to do but take a minute to breathe. Unless your spouse is a trained investment professional, don’t overwhelm them with your panic. They might help you make an even worse decision. After you have recovered from this initial panic, it is time to take inventory of your current holdings. Opportunities abound. Do not try to time the market!
Don’t Hoard Cash When You Feel the Belt Tighten
A common mistake that investors make during periods of high inflation is hoarding cash. Although it is certainly a prudent idea to have a store of cash for immediate needs, being cash heavy is not wise.
I realize that the pain might feel unbearable in the short term but moving to cash and liquidating your portfolio could likely lead to a loss in real terms.
Let’s say that you have a high interest account that is earning 2% like this one at CITI. Even with an account that is this high yielding, which might be a decent place to park emergency funds, holding the bulk of your assets in cash is a losing strategy in the long term.
The inflation number for July 2022 was 8.5% year over year. If you have $400,000 sitting in cash at 2%, the nominal value of this investment would be $408,000 12 months from now. Should inflation stay at this elevated rate of 8.5%, the value of that $408,000 would have the same spending power as $373,320 today. In real terms, this would mean that by hoarding cash you might feel safe, but you are safely eroding your assets.
Don’t Take Extreme Risks to Overcome the Pinch
A second and potentially more devastating mistake that investors make during periods of high inflation is taking on extreme and uncomfortable risk.
While some investors flee to the conservative, others flock to higher risk.
On the surface this makes some sense. You see inflation is on the rise, and you conceptually understand that in order for your investments to outpace inflation you need to achieve a higher return. One way to do this over the long term, would be to introduce more risk into your holdings.
Here are some things that may happen:
1. High risk investments tend to underperform in periods of high inflation
2. Portfolios can become overweight in specific sectors
3. Investors tend to sell into the panic
4. Your Ultimate Goal can get lost in the process
The only risks that you should take are those that lead you to your ultimate goal. There is no reason to take on risks that you don’t understand for the sole purpose of chasing returns. There needs to be a goal-oriented approach. So…. don’t do it alone!
When You Are Feeling the Pinch, Seek Help
The most prudent advice I can provide when you are feeling the pinch is to get solid sage advice from a trusted professional. A mistake that many investors make when they are feeling the pinch is they look only inward for guidance.
After you have taken a moment to breathe, you will realize that neither hoarding cash nor taking extreme risks are in the best interest of your financial future.
A market drop doesn’t mean you need to change your investment strategy; however, staying the current course might not be what ultimately provides you with the best approach to reach your ultimate goals.
You need the ear of someone that has been researching the markets for 40+ years; a trusted team of advisors that work with the heart of a teacher.
At Dupree Financial, we have been through the ups and downs and have the calm demeanor to take a holistic approach to your financial situation. Contact us today for an absolutely free, no obligation consultation. Let’s make sure that your current investment strategy is on track to meet your goals.