Should You Dump Stocks Due To Inflation?

Key Takeaways

• As inflation increases, the Fed will react by increasing interest rates. The end result is market volatility and stock dumping.
• It’s tempting to dump stocks in order to liquidate your assets during periods of uncertainty.
• Not all companies are equally impacted by high inflation, it’s important to adjust your portfolio before dumping your stocks.

With inflation rising in 2022, hitting a 40-year high this past June, we’ve already begun to see the consequences reflected in everything we buy to the volatility in the stock market. Yesterday was a great example of that volatility. Many investors have sold off their shares throughout the year due to fear amidst market uncertainty. Whispers of a longer period of inflation leading to a possible extended recession are picking up in terms of volume and velocity.

When inflation goes up, investors start dumping stocks as panic hits the stock market. While the Federal Reserve tries to control inflation by increasing interest rates, the consequences are felt in the stock market, where volatility leads to panic selling. It’s undeniable that inflation is scary. You have to watch the prices of everything go up around you while your investment returns dwindle. This is essentially why the idea of dumping stocks becomes common during periods of high inflation.

We’re going to consider the idea of dumping stocks because of inflation, and focus on what you need to know so you don’t lose hard-earned money and forgo future returns.

Why do people dump stocks at a time like this?

As we edge ever closer to an official recession, many investors are nervous about the stock market. Perhaps the most significant reason being that high inflation leads to stock market volatility. With such volatility, it’s common to see investors panic and liquidate their assets, selling stocks at a loss.

So why exactly do people dump stocks due to high inflation?

The economy slows down

Your purchasing power goes down when the price of goods and services goes up. The economy slows down in general as people wait for a return to stability. When that happens, shares of companies on the stock market begin to fall. Therefore, many investors start dumping their shares since they’re less valuable than they once were.

Interest rate increases cause volatility

As inflation begins to soar, The Fed starts to take action by raising interest rates to control inflation. The consequence is that borrowing money is more expensive, so excess capital is removed from the market. When interest rates go up, many companies struggle since they’re using debt as leverage and interest payments on their debt also increase. Regular people will feel the effects of higher interest rates as it becomes more expensive to borrow money to purchase a home, a new vehicle, or even the newest technology.

Investors don’t like uncertainty

We can’t underestimate the fact that most people don’t like the uncertainty that comes with a recession, which is often triggered when the Fed combats high inflation and the entire economy has a downtown. Unfortunately, we’ve been spoiled with a bull run and solid gains since March of 2009 at the bottom of the great recession. Many investors are deciding to cash out at signs of our current economic turmoil.

Cash is king, according to some

Return of your principal becomes more important to some people than return on your principle. There’s nothing worse than watching your investment portfolio drop in value as you wonder if you’ll ever be able to recover your finances. For risk-averse people or short-term investors, cash can be a major holding in your portfolio.

Inflation causes the price of everything to increase

High inflation means that everything’s more expensive now. The cost of living goes up, so people may start dumping their stocks to access their cash. It’s challenging for most of us to decide how to combat the increased costs of everything. So many investors decide to liquidate their assets.

There are better investments when inflation is high

Stock market returns don’t seem so impressive when inflation is over 8%. This means that if you’re not at least earning 8% on your money, then you’re not keeping up. Investors are going to seek out better ways to invest their money so that it doesn’t feel like they’re not making wise financial moves. The result is that some people dump stocks in favor of other investments (from gold to real estate).

Business growth slow way down

Business investments become more expensive when the Fed raises rates to combat inflation. When this happens, businesses must put major projects on hold as they struggle with financing. This will make some stocks less attractive, so investors might start selling stocks if they feel that the company won’t be able to grow as expected.

Investors use leverage

Many stock market investors also use leverage by taking out margin loans to invest in shares. When the interest rates rise, these margin loans get more expensive and it’s suddenly no longer a good idea to take these risks. Therefore, these investors start to sell and consider dumping their stocks for better investments.

All of these consequences of high inflation have the same result: stocks get sold off, almost regardless of the share price. Many companies with strong financial results lose value through no wrongdoing of their own. When investors start dumping stocks, the market panic begins and more people start to dump their stocks. This leads to days of massive sell-offs where markets plunge into turmoil.

Should you sell stocks due to inflation?

Is it worth selling your stocks due to inflation? While it’s easy to urge you to hold, the reality is that it’s not always going to be easy sitting on your hands and watching your portfolio lose value. Some investors simply need the cash for other things. Still, we must remind you of the old investing adage that time in the market is better than timing the market.

It’s impossible for any one investor to consistently know when the right time to sell your stocks will be for the highest possible returns. You could sell at the bottom and then regret dumping your stocks by missing the recovery and being fearful to get back in. You don’t want to miss out on long-term gains because you panicked and sold too soon.

It’s also worth noting that not all stocks are impacted equally by inflation. When prices of goods go up, consumers may start to become more budget-conscious so they start to spend less, which leads to less revenue for some businesses that would fall under the category of discretionary spending. However, stocks in the energy sector will likely be able to keep up with inflation since people will still have to spend money on utilities. Other industries tend to do well even during times of high inflation or a recession (like healthcare or consumer goods). So while technology companies may struggle to keep up with inflation since there’s less consumer spending, other companies will continue to meet revenue expectations.

When should you sell your stocks?

Some people are long-term investors. Others invest for the short term (like saving up for a wedding, a new home purchase or another near-term goal). There will be scenarios where it makes sense to sell your stocks: for example, if you need access to cash to make a major purchase in the near future. If you need money for your wedding or a down payment for a new home, then you may want to consider selling your shares.

But it’s an important reminder that it’s never a good idea to sell your shares in a panic due to a turbulent day in the market. If your money’s invested in companies or funds that are performing well, there’s no sense in letting market volatility push you into a rash of short-sighted decisions.

There could also be a scenario where you find an investment that produces better results for you. With inflation at 8%, you would have to find investments with a return of 8% just to keep up. If you’re considering investing in a different asset or possibly returning to college to expand your skills during this period of uncertainty, then you may benefit from selling your shares.

Bottom line on inflation and investing

Inflation impacts every company differently. Warren Buffett’s legendary investing philosophy is that you should be fearful when others are greedy, and greedy when others are fearful. This is easier said than done, nobody wants to see their accounts dropping in value. That said, you can still invest your money during times of high inflation and market volatility.

You can also make your portfolio more defensive to handle the uncertain times. Take a look at Q.ai’s Inflation Kit and protect your investments from dropping in value. Better still, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industries you invest in.

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