‘Inflation’ looks set to be a keyword that dominates the rest of 2022. But it is not anything new and out-of-the-ordinary. Often enough, the reaction to inflation can be worse than the effect of inflation itself. As an investor, what you need to remember is ‘market downturns don’t last forever’.
The Standard & Poor’s 500 Composite Index has typically dipped at least 10% about once a year, and 20% or more about every six years, according to data from 1951-2020. While past results are not predictive of future results, each downturn has been followed by a recovery and a new market high.1
By definition of its characteristics, inflation can make debts easier to pay off and allow employees more room to negotiate for higher wages. But on the flipside, it also erodes purchasing power, depletes savings and in severe cases, destabilises the economy.
Then again, inflation doesn’t always spell gloom and doom for the markets. It has been observed that some asset classes tend to perform better during higher-inflation periods. Among 15 major asset classes in inflationary periods since 2000, the top performers included oil (41% return), followed by emerging markets stocks (18%), gold (16%), and cyclical stocks (16%), according to a Wells Fargo study.2
So what can you take away from the above? The key is DIVERSIFICATION.
A diversified portfolio doesn’t guarantee profits or prevent your investments from dipping in value, but it can definitely help reduce risk. By spreading your investments across a variety of asset classes, it can buffer the impacts of inflation and market volatility on your portfolio.
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