How to Invest During High Inflation and Amid Recession Concerns

The current high-interest rate environment has sent many investors searching for viable investment strategies for a high inflation period such as this. Inflation and recession have been the two big, scary words on the minds of all investors since the calendar rolled over to 2022. The reality of inflation and higher interest rates along with the concern of a recession has led to a difficult year for virtually all financial assets, which is easy to check by looking at our financial statements or pulling up a year-to-date chart.  

But, as of today, everything we know is in the past and the future is notoriously impossible to consistently predict. So, what to do in an environment where interest rates and inflation have risen dramatically, and concerns of recession abound? 

Investment During High Inflation and Market Volatility 

First, take a step back and breathe. If you’re investing, you’re in it for the long haul. If you’re not investing, then you’re speculating and I’m afraid the science of sound wealth management won’t be much help to speculators. Economies and markets have and will always go through periods of upheaval and recalibration. In a very simplistic way, it is this uncertainty and risk that creates the returns we all like so much. In other words, some bad years here and there is the price of admission. 

We all know that old saying that past performance is not guarantee of future results. This is so we don’t look at historical returns of an investment and assume that we will get those returns in the future. Rather than rely on slick marketing that is known to cherry-pick data, financial economists have a name for what we should use instead when modeling sources of returns: expected returns.  

Expected Returns Increased Over This Tumultuous Year 

Now for the really good news: expected returns are much higher now than they were at the first of the year. If you were comfortable investing last year, you should feel positively stoked about investing now, as the expected return on every asset class investment you hold is higher today than it was then.  

So now that we’ve stepped back and calmed ourselves, what can we do? Perhaps most importantly, we must acknowledge that no one can consistently predict the vagaries of financial markets. The danger of attempting to time the market and missing out on positive returns far outweighs the potential benefits of moving in and out of the markets at the right time. There is not a shred of evidence that anyone can engage in this timing and consistently deliver excess returns. In fact, the evidence shows that an overwhelming majority of individuals and professionals fail miserably when they try. 

Now Isn’t the Time for Inaction 

Sitting on our hands, however, is not what the evidence shows we should be doing. Our job as fiduciary advisors is to seek opportunities to rebalance your portfolio. We consistently look for asset classes that have underperformed and seek to allocate assets into them, the buy low part of “buy low, sell high.” Additionally, we’re looking for opportunities to engage in tax-loss harvesting, which enables our clients to offset current or future capital gains in taxable accounts. For certain individuals and families, Roth conversions can make sense when markets are down. These are all items we evaluate while believing in the long-run power of financial markets and their ability to reward those who remain disciplined and patient in the face of volatility. 

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