Managing a stock portfolio during a time of high inflation is daunting for both novice and experienced stock market investors. During an economic crisis, investors tend to realize they have a lower risk tolerance than they anticipated. This can lead to them selling their stocks for a loss, instead of waiting patiently for the stock to rise.
If you're just getting started in the stock market, or you've been active for a while, we understand how it feels to worry about your portfolio shrinking due to inflation. The good news is, we're not just going to sit and watch you lose what you've worked hard for.
That's why at Brown Investors, we've put together this informative guide about inflation and managing your stock portfolio during an economic crisis.
So, without much ado, let's jump right in!
Inflation Vs. Hyperinflation: What are They?
For starters, inflation is the steady increase in consumer commodities prices—goods and services—in an economy. According to a report by Investopedia, when this happens, it leads to a decrease in money purchasing power at a specific period.
Like inflation, hyperinflation leads to an increase in the cost of living. The only difference is that it affects the economy at a higher level. During hyperinflation, the prices rise rapidly and are always out of control. In other words, it's a rapidly rising inflation at unsustainable rates.
How Inflation Affects Stock Prices
Inflation and hyperinflation need to be kept under check for the overall good of the economy. The two have both positive and negative impacts on the economy. This is to say, while some sectors of the economy will benefit from it, some will be crippled.
That's why savvy economies strive to balance inflation at manageable rates. Below, we're going to dive deeper into how the phenomenon affects stock prices.
Share Price and Effect of a Market Correction
Inflation implies that one would need more than the usual amount of money to afford the goods or services. As the value of the currency drops, the prices of commodities go higher at an unsustainable rate. This potentially affects the value of stocks in the long run.
Ideally, inflation has both its merits and demerits, depending on what side of the coin you are. For instance, an increase in daily consumer commodities increases the cost of living for the average person. Also, anyone holding cash (currencies) will suffer a drop in the value of their portfolio. On the contrary, tangible assets like stocks and real estate see an increase in value.
More often than not, hyperinflation is more devastating than normal inflation. Therefore, most developed economies lay down strategies to avoid this.
According to the US Bureau of labor statistics, the federal government is always working on maintaining inflation at manageable rates. To measure the inflation rate, the Fed uses the consumer price index and strives to maintain the rate below 2%.
When prices rise to unsustainable levels, a crash is inevitable. Normally, the crash can be temporary or lasting for several days, weeks, and months. Mostly, the fall is always between 10- 20%, and according to Forbes report, this suffices for a market correction.
When share prices get to unsustainable levels and the bubble bursts, tech companies, and the housing market suffer the most. This is evidenced by the dot com and housing market bubbles that occurred in the late 90s and early 2000s.
As you can see, during a market correction, stock prices decline in value. Since this can last for a while, it puts your stock portfolio at risk. The best way to survive market correction is to have a diversified portfolio. Guess what? This can only work if you're a disciplined investor.
Managing Stock Portfolio during Inflation and Market Correction: Final Thoughts
From time to time, inflation and the consequent market corrections will be unavoidable. Since worrying or hoping aren't a strategy, we recommend that you buy and hold.
Managing a stock portfolio on your own can be daunting; we get it. But we want you to know that we got your back always. If you're concerned about inflation, Contact us or subscribe to our newsletter and join our membership because we're steering members toward key investments that hedge against inflation.