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Risks Of Stock Market Losses Vs Risks Of Losing To Inflation

Monday, January 14, 2013 - 12:48 PM
From the NYT Bucks Blog
The reality of investing is about making these tradeoffs. It’s about raising your hand and saying, “I’m O.K. with taking on this risk over here, in order to get rid of that one over there.” That’s essentially what the market is —- a place to trade risk and reward.

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My take on comparing these risks:

When the stock market tanks like it did in 2001/2002 and in 2008/2009, there's not much you can do. If you take your money out of stocks, you may be locking in big losses. If you add more money, you might be losing more money as stocks continue to drop. The best approach is typically to continue to add to investments through dollar cost averaging and to maintain allocations that were in your investment strategy.

If you're in safe investments that are low-yielding, there is a risk that inflation will eat away those savings. However, rising inflation usually happens slowly. That gives people time to adjust. They can cut back on spending in several areas to reduce the impact of inflation. There are limits to this, but it seems the risk of losing to inflation is easier to deal with compared to stock market crashes.

If inflation does increase rapidly, this will not only impact savings, but it will likely hurt the stock market.

It makes sense to keep diversified, but it sure seems all too common for financial planners to emphasize inflation risks and de-emphasis stock market risks.
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Ken TuminKen Tumin5,441 posts since
Nov 29, 2009
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