Trial by Inflation: Patience is the Guardian of Joy (and Your Money)

I guess it's human nature to seek out advice from others or mimic what the crowd is doing during inflationary times, but that can be worse than experiencing inflation itself. As the late Ronald Reagan once said, "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." These times call for patience in spending and investing. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Thief of Joy

Since the early 1980s, my top New Year's resolution has been to stop comparing what I do with what I think others are doing. I suppose it’s inherent in nature for folks to track the behavior of others, but it’s so unproductive. There’s an old saying that “Comparison is the thief of joy.” Comparison to someone else’s behavior…to someone else’s shiny objects…to a neighbor’s well-behaved children…to a good friend’s picture-perfect life, etc.

But what do such comparisons have to do with your life – with market downturns – with the ravages of inflation? Bear markets and inflationary cycles alone create ample anxiety about not being able to spend in the same manner as before…much less trying to emulate others. Many times in bear markets investors panic and sell, or as I like to say, "The thundering herd heads for the exits." With inflation, it starts with how we spend money. Will I have sufficient financial resources during the current inflationary spiral to maintain my current lifestyle or keep pace with friends and neighbors? Well, how about this: Why not NOT try to keep pace?

Survival of the Fittest

Everyone pursues his or her own strategy when markets crater. But, it's been my experience that, In bear-ish markets, investors tend to do things they might ordinarily not do. For example, some attempt to time the investment market, which immediately exposes them to more risk.

But I am noticing an evolving trend in today’s investment community. More folks seem to exercise greater patience during market volatility - like that which we have been experiencing lately. This, in turn, increases their probability for successfully emerging relatively unscathed from a chaotic market. Patient investors are simply more likely to survive mistakes they might otherwise make. And that’s really what it’s all about in a down market…survival.

Undue Influence

It’s natural to seek out your kind of investor group. And it’s natural to support convictions of your approach to investing. But don’t take it to unhealthy extremes. In short, don’t let your life be defined by your portfolio or by your 401(k) balance or your net worth. Instead of being influenced by what you read on the internet or hear on some cable news show, do something constructive. I can assure you the market will not be impacted one way or another by your careful attention to the news. But your health might be.

Avoid taking those red numbers in your reports personally. They’ll turn black soon enough. Yeah, I know. You felt like a genius when the bull was raging, and now you feel like a fool. Don’t despair. Odds are, you’re a commonsense investor with a quality portfolio, so be patient, stay cool, and do nothing. It’s often THE wisest choice.

What Goes Down...

Don’t seek perfection when trying to control your portfolio during downturns. Don’t worry about those jagged short-term plot lines. Those smoother long-term plot lines are the ones that matter, and historically, they go up. Doing something…anything…does not guarantee improved results. This illusion of “taking control” in a wildly-erratic market is more likely going to lead to emotion-induced mistakes than improve performance. It’s likely too late to hedge…too late to correct your allocation. And remember, it almost always feels like it’s too early to buy and too late to sell during a bear cycle.

Bear markets happen…and often. Prepare for them in advance both physically and mentally. Never forget - the tops and bottoms of both bull and bear markets are completely out of your control. All the more reason to invest in a highly-diversified, high-quality portfolio and patiently stick with those good decisions through thick and thin.

Save More with Less

One way to collar some of the fear caused by today’s continuing inflation is to save more by spending less in those “less essential” categories of your household budget. It's counterintuitive, sure, since price increases relentlessly assault all aspects of your budget. But knowing that your savings account is growing, or not depleting – a cushion against the unknown – can be soothing to the soul. Call it your emergency fund - Rainy Day fund - call it whatever, just add to it (preferably on a dollar-cost averaging basis).

Shifting Priorities

After allocating additional dollars to savings, reprioritize the remainder of your income. By thinking in terms of percentages versus dollars, you often worry less about income allocation in today’s inflationary environment.

For example, restructure your personal finances from savings (15%), travel, socializing and entertainment (25%), and recurring expenses like fuel, rent/mortgage, and groceries (60%) by shifting 5% more to savings from traveling, socializing and entertainment. Focus on your own family’s priorities, not what someone else might be doing.

Bare Necessities

If this sounds and smells like budget-cutting…well…in a way it is. We all face those periods in life when downsizing the family budget - slashing spending - becomes a simple necessity.

Part of the process involves deferring luxuries such as travel and entertainment. It might be psychologically uncomfortable, but it will only hurt for a little while. That increase in savings can later help fund those “temporary cutbacks." It’s really a matter of prioritizing today what might be more affordable down the road when things get better. In short, putting off today what may be possible in the future will help accommodate the erosion of what today’s dollars will buy.

In Sum

Fretting about financial resources is a natural part of life. Particularly when facing an economic situation like a bear market and rampant inflation – over which you have little control except to spend less (preferably by saving more). But comparing your unique situation with the behavior of others is not only unproductive, it allows the comparison thief to needlessly steal your joy. Simply making a few minor adjustments in your savings versus spending habits is a big part of the solution. Also, it reminds you to count your own blessings. Remember...you can't take it with you!