Inflation vs. Market Crashes: Navigating the Subtle and Sudden Storms of Personal Finance

Do you worry about the stock market taking a dive or inflation rates soaring? You might be surprised to learn that, when planning for the future, steady inflation can have a bigger impact on retirement savings than a one-time market drop. Many of our clients are surprised to find out that a consistent 3% rise in prices each year can be more harmful to their retirement funds than a sudden 30% investment loss that recovers over four years.

This comparison shows us that the quiet, ongoing effects of inflation can actually pose a greater risk to our financial security than the immediate, though temporary, effects of a market downturn.

Let’s compare these two big financial concerns: inflation and market crashes.

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Inflation: The Sneaky Money-Shrinker

Imagine inflation as a stealthy force that quietly reduces the value of your money. Over the past 20 years, we’ve seen inflation as gentle waves in an otherwise calm sea, with prices creeping up slowly. It felt manageable. But recently, it’s as though a storm has hit, and inflation rates have shot up.

This means the $100 bill in your wallet isn’t going as far as it used to, a change that’s hard to ignore after years of mild inflation. It’s not just about paying more at the store; businesses face higher costs and raise their prices in turn, and interest rates have climbed to keep inflation in check, impacting loans and mortgages. After two decades of low inflation, we’re now facing a new challenge of higher rates, forcing us to adjust.

Market Crashes: Navigating Financial Storms

Market crashes are the financial world’s sudden storms, dramatic and frightening. Yet, focusing solely on the fear of a crash can distract us from inflation’s slow, consistent damage. While crashes can be intense, the financial industry has studied and developed strategies to deal with them, making them a known challenge.

Comparing Market Crashes and Inflation: Three Key Points

  • Timeframe: Market crashes are short-term, like a sudden drop on a roller coaster, scary but eventually recovering. Inflation, however, is a slow, relentless force that erodes the value of our money over time, posing a greater long-term threat.
  • Visibility: Crashes grab headlines and attention, overshadowing the quiet, pervasive effects of inflation. It’s easy to overlook something that doesn’t make the news, but ignoring inflation can be a mistake.
  • Experience: High inflation is unfamiliar territory for many, making it a challenging new obstacle. In contrast, the financial world has decades of experience with market crashes, providing a foundation to handle them.

Seek Professional Advice

Every person’s financial situation is unique, and navigating high inflation or preparing for market fluctuations requires a tailored approach. Seeking advice from a financial professional can help you make informed decisions that align with your personal goals and risk tolerance. 

Researchers have found that Canadians using a financial advisor accumulated substantially more assets than comparable investors who go it alone. The impact of advice varied across the studies and associated economic conditions. The research found that after 15 years, investors accumulated 2.7 times more assets in 2010, 3.9 times in 2014 and 2.3 times in 2018 than investors who do not seek advice. In explaining why advised investors saved more, the researchers identified higher savings rates, a greater allocation of non-cash investments, and disciplined behaviors acquired through financial advice (for example, not selling through market downturns).

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