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  • Writer's pictureRebecca Herbst

Inflation? Bear Market? Stay calm.

Updated: Dec 28, 2022

First, a quick newsletter update: This summer, Joe and I will be leaving for Europe for an extended adventure. We are VERY excited to explore, relax and unplug. This trip has me thinking about the cadence at which I reach out to you guys, and I’ve decided that on a go-forward basis, I’ll no longer be writing a monthly newsletter. Instead, it’ll just be a plain ole newsletter. It’ll go out as and when I have valuable information and insights to share. As I have always promised you, Yield & Spread doesn’t spam, so expect fewer emails rather than more :)

 

This newsletter is inspired by a number of students who have reached out given today’s economic environment. There are two major things going on that have people nervous:

  1. Heightened Inflation: The Consumer Price index (CPI), used to measure inflation, has risen 8.3% year over year. Compared to the historical average of 3.3%, you would be right to assume this is painfully high. I’m sure you guys are feeling this when you grocery shop, fill your car with gas, pay for child care, and more. The organic milk we buy at the grocery store has gone up over a full dollar since the beginning of the year. Rolled oats up $0.40. Peanut butter, $0.30. The list goes on.

  2. The market is “down”: The S&P 500 is hovering around a 52-week low. If you own VTI like I do, this ETF is down 16.4% since the beginning of the year. This always feels scary, but “down” is a relative term. On the flip side, VTI is up a whopping 66% over the past 5 years…. so timing makes it all relative doesn’t it?

Let’s explore this more. As there are very bright people out there who have already written about these very subjects, I will share some resources with you. And hopefully you’ll walk away from reading this newsletter with a bit more pep in your step!

Heightened inflation

In the Learn to Invest & Build Wealth course, you learned that the total stock market has, on average, grown 8% year over year. If inflation were to continue to also grow at 8% year over year… this could be a problem. Growing stock prices would be pulling you positively in one direction, and increasing inflation would be pulling you negatively in the other direction. The 8% stock growth would effectively cancel out the 8% inflation rate. And you would end up with no real wealth gain.

But the world is not so black and white!

In his latest blog post, Mr. Money Mustache clearly outlines why the above scenario isn’t realistic for a wealth of reasons: high inflation today doesn’t always mean high rates tomorrow, stocks are meant to keep up with inflation, and competition will help bring prices back down. You can read the full article here, but I’ve pulled out what I think is the most relevant excerpt:

“Inflation has been around since the dawn of money, so we know that it can co-exist with an increase in prosperity. But for the past few decades, the rate of inflation in most rich economies has been extremely low, which means it simply hasn’t been at the top of the news headlines. Until today, when inflation has made a sudden return…The first rule of this situation is the same as all other situations: don’t panic, and enjoy this whole journey as a learning experience. Prices will fluctuate, and the world’s economy will adjust accordingly in the coming years. You and I will continue to prosper”

For those looking for a better understanding of how inflation impacts varying demographic groups (e.g. the impact to recent grads vs. retirees), this recent podcast from The Daily might be worth a listen. Price increases are not a uniform 8% across all products and services. If you haven’t bought a car in the past year, don’t eat meat, and don’t have childcare expenses, it’s very possible your inflation rate is less than 8%.

Lastly, if you have a fixed rate loan (like a mortgage or student loan), you are actually benefiting from higher inflation! Inflation means the costs of goods and services are going up, which means your dollars are being devalued. You are essentially paying back the lender money that’s worth less than when you took out the original loan.

The Markets are “Down”

I’ve said it over and over again in the course… The stock market ride might be volatile but the market always goes up. Everything is going to be ok.

I repeat. Everything is going to be ok.

Market drops will happen and are to be expected. As long as you don’t panic and sell everything you own, the value of your investments will rise again. JL Collins explains these periodic and natural drops and why they are a part of the investment path. If you’re like me and find peace in meditating, listen to this Guided Meditation for When the Stock Market Is Dropping from JL. Largely, it makes me chuckle, but I do find it to be quite calming.

For those of you who need a more positive angle here, look at this time as an opportunity to buy stocks “on sale!”. Perhaps you might even adjust your spending to buy more stocks than you normally would while prices are down.

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As always, thanks for reading and supporting the Yield & Spread mission!

Boost your Wallet. Wellbeing. World.

Rebecca


 

Disclaimer: The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.



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