For consumers, inflation is raising jitters and for good reason— rising prices could wipe out gains or stall the nation’s economic growth.
Friday’s Consumer Price Index report showed inflation at a 39-year high, but the warning signs have been there. Americans say being able to afford to pay their bills and inflation rank second and third, respectively, in a new Monmouth University study released this month. The coronavirus pandemic was first.
What’s an investor to do during inflation? For starters, don’t panic. Take sensible actions to manage your money and add peace of mind as the economic picture continues to evolve.
Here are five steps to allow you to sleep better:
1. Focus on stocks and max out your 401k
If there’s one thing many financial managers agree on, it’s that stocks are far better in inflationary cycles than bonds. Over the decades, stocks have returned an average of about 10%, which becomes 6% to 8% when inflation is taken into account.
Maxing out your 401k, which also may come with a company match, is a great way to take advantage of stocks on the money you won’t need until retirement.
Here’s why stocks do better in times like these:
Companies can continue to innovate and are often in industries that can pass on rising costs to consumers. Nobody likes higher prices, but folks are likely to be willing to swallow them. Thus, stock prices still can rise. For the cautious, focus on companies that make consumer staples, like toilet paper or dishwasher detergent, that will profit in good times and bad.
Bonds are having a tough time after years of solid returns. They are sold at fixed rates that can leave them at a disadvantage as they are outpaced by inflation. Bond funds, especially those with shorter average maturity durations, can take some of the edge off the pain.
►Latest CPI report: Consumer prices climbed 6.8% in November from a year earlier, the most since 1982, as inflation surged higher
►Inflation surges to 39-year high: How much more are you paying and what’s the damage for Biden?
2. Consider alternative investments
Real estate has been a traditional winner during an inflationary period. If one holds on to a property in many cities, there’s a good chance its value will keep up with or outpace inflation.
The verdict is mixed, but some believe gold will do well in recessions. It has been viewed as a haven of safety, too, when fear grips the stock market.
A surer bet is the Treasury Department’s I Bond, a savings bond with a rate tied to inflation that is currently paying 7.12%. The rate easily outpaces interest checking accounts or money-market accounts. You can buy up to $10,000 worth of I Bonds per calendar year.
►What’s not to love? The US savings bond that earns 7% with inflation protection, yet gets ignored
3. Ask for a pay raise at work
Aside from your investments, consider income from your job. With 1.5 open jobs for every unemployed American, employers are raising wages to try to lure workers. New hires at your company may be offered higher wages than you. So weigh asking for a pay raise. The boss can always say no. At very least, your polite request may underscore that the firm needs to keep its salaries on pace with the market.
Social security recipients are receiving their biggest cost of living adjustment in 40 years in 2022 due to inflation. Working people surely believe they deserve a boost, too.
►$5 trillion and growing: Demand for a single-family rental is ‘through the roof’: And Wall Street is on alert
►The jobs gap: Massachusetts tops 5 states with the worst worker shortages. See where your state ranks.
4. Don’t pay off low-interest loans early
Many responsible savers have an impulse to pay off loans early to remain as debt-free as possible. Certainly, that’s good advice when it comes to high-interest credit card debt. But look carefully at your interest rates: inflation may be higher than the rates on certain debt, in which case you should resist the urge to dispose of the debt early.
Received one of those zero or 1% car loans? Make the payments on time — and no more.
Student loan debt? Many graduates leave college with a huge burden, but often one with a low, fixed interest rate. Again, the goal should be to make payments on time, without becoming delinquent, but not trying to pay it off early as long as the inflation stays ahead of it.
►The Great Resignation: ‘Stressed and worn thin’ workers seek more fulfilling jobs, better work-life balance amid COVID-19
5. Remember it’s a long haul
Many dedicated savers may feverishly try to rejigger their portfolios to deal with inflation, which is understandable. But there are good arguments for sticking by your balance of stocks, bonds and other investments.
For most, a nest egg is set aside for big goals like new homes or for retirement. Many are wiling to sacrifice higher returns for the sake of lower volatility. Unless you’re the kind of saver who does the homework and is laser-focused on the twists and turns of the markets – a day trader or someone who thinks they can outsmart the indexes – it makes sense to stand by your mix.
The old adage holds true for the average investor: you can’t time the market. One never knows when the market will turn or in this case, when inflation will ease. Financial instruments held over many years and decades almost always end up with a positive return.
►The Daily Money newsletter: A collection of articles to help you manage your finances like a pro.
►Planning ahead: Hard work goes into retiring. Our retirement newsletter helps you plan well.
Contributing: Paul Davidson
This article originally appeared on USA TODAY: Tips for investors during inflation with stocks, bonds, gold and more