KF Update – Markets, Inflation, & Perspective

3 Minute Read

Good morning, I hope this email finds you well and you had a nice holiday.  I wanted to send along some of our continued thoughts around the markets and inflation.

In times of a declining stock market, we sometimes wonder or lose perspective as to why we are even investing in the stock market in the first place.  In past articles we have emphasized the importance of focusing on the long-term, trying to drown out the noise, and not making any major changes such as selling out of the market.  In this article we want to illustrate why we invest in markets; maintaining the purchasing power of our money and long-term growth of capital.

Inflation
Over time as prices increase, the purchasing power of dollars decreases.  One of the important reasons we invest in the stock market is to keep up with those price increases over time.  Below is an illustration of the increase in the cost of living going back to 1980, 1990, 2000, and then today along with the returns of the Dow Jones and S&P 500.

*Cost of living data and index information was taken from the website http://www.thepeoplehistory.com,  Seek Publishing’s ‘Remember When’ ,www.macrotrends.net, fred.stlouisfed.org, http://www.statista.org, http://www.tasteofhome.com, and http://www.southernliving.com.  

Illustration of Investing at a Stock Market Peak 15 Years Ago
In another example, let’s look back to the financial crisis of 2008.  Let’s say you invested at the peak of the market, the worst possible time, September of 2007.  The Dow Jones at that time was at 13,895 and is currently over 31,000.  Investing at the worst possible time 15 years ago, and going through 3 market downturns, a portfolio still could have appreciated over 130%!!

*Source Kwanti

The Dow Jones ultimately fell to as low as 6,547, so buying into the stock market anytime during the downturn could have been advantageous and increased the long-term growth of a portfolio.

Taking Advantage of a Stock Market Downturn
There are several ways we can take advantage of a downturn in markets, they include:

Rebalancing.  This is part of our role as investment manager on client accounts,  rebalancing client accounts and buying into lower stock prices to help take advantage of market downturns.  We are also reinvesting all dividends within client accounts to take advantage of lower stock prices.  

Roth Conversions.  With lower stock prices, you could consider converting Pre-tax dollars to Roth and paying taxes on the lower values.  When the markets eventually rebound, the growth of those dollars in the Roth account are completely tax free forever.

Increase your Stock Positions.  If you can tolerate moving more to stocks at a time like this, over the long-term it could help the growth of your portfolio and the change does not have to be extreme.  For example, if your portfolio is 50% stocks and 50% bonds, you could consider moving to 60% stocks and 40% bonds.

If you would like to increase your allocation to stocks, or would like a Roth Conversion analysis, please contact the office as we can help with either of those.  We hope you find this information helpful, and again, please do not hesitate to contact the office with any questions.

Best,
Clint, Renee, and Abby