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How Does Inflation Impact the Stock Market? Investing Advice for When Stocks Tumble

image of smartphone taking a photo of a stock bar graph
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This story is part of So Money, an online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.

What's happening

The market experienced its worst day since June 2020 on Tuesday, in response to higher-than-expected inflation numbers.

Why it matters

During a "bear market" -- or prolonged period of price declines -- some investors may be persuaded to panic sell, especially if the economy enters a recession.

What's next

Seasoned financial experts, experienced in navigating up-and-down market cycles, offer caution and advice.

It hasn't been a good week for the stock market. Or month. Or year. Tuesday marked the worst day for the stock market in more than two years, in response to higher-than-expected inflation levels for August in the most recent Consumer Price Index report.

The Dow Jones Industrial Average, a stock market index containing 30 of the most prominent, public US companies, dropped by 1,276.37 points (3.9%), while the S&P 500 Index, a broad market price index that includes the New York Stock Exchange and Nasdaq, fell by 177.72 points (4.3%). This is largely due to investor disappointment over stubbornly high inflation, currently at 8.3% for the past year, which is pervading despite the Federal Reserve's attempts to cool rising prices.

Next week, the Fed is expected to raise interest rates by another 75 basis points -- the fifth interest rate hike this year -- and it's likely the market may experience another drop in response. Since inflation data for August was higher than predicted, worries of the Fed raising rates too aggressively and triggering a recession continue to cause volatility in the market.

Whether you own stocks directly or have money in a retirement plan, the question on everyone's mind is how long this financial downturn will last. For a newer generation of investors who started investing during the last 10 years, the question is, do you ride out the storm or make a quick escape?  

The decline in the market is unsettling and often leads to panic. But bear markets are also normal. During these times, it can be useful to talk to people who have been through it before to avoid major money mistakes. I spoke to five experts to get their best advice and weigh in on the current market sell-off. Here's what they said. 

Stay the course. This too shall pass

Daniel Crosby

Daniel Crosby is chief behavioral officer at Orion Advisor Solutions and author of the book The Laws of Wealth. Part of what defines a great investor, he told me, is having the mental toughness to see it through the best and worst of times. His biggest reminder to help us navigate volatility is that "this too shall pass."

"What I love about this phrase is that it keeps us from both fear and greed," Crosby said via email. "In a bear market, when we look around and see nothing but negativity, we can be assured that this will pass and that brighter days are ahead. In a bull market, when we may be tempted to overextend ourselves financially or get greedy, we can likewise be assured that leaner times are ahead and that we ought to stick with the fundamentals."

Don't try to time the market. There are no deadlines in investing

Adam Seessel

Adam Seessel, author of the new book Where the Money Is, has served as both a journalist covering the stock market and a professional investor on Wall Street. Having worked through multiple market cycles, he cautions against waiting for the "best time" to invest. Success is less about timing the market and more about your time in the market. 

"There are no deadlines in investing," Seessel writes in his book. "Urgency … induces poor decisions. Good investors show up at their desks every morning with the goal of slowly advancing their understanding." 

When Seessel joined me on my podcast, he added that if you feel bullish about the long-term future of US capital markets, then that should be enough to convince you to buy and hold. "You have to ask yourself, do you believe American business is going to be more prosperous or not," he said. "If you think yes, then you need to own a piece of that action." 

Market keeping you up? Revisit your risk tolerance

Linda Davis Taylor

If you're experiencing extreme anxiety due to market volatility, it could mean that you have a smaller appetite for risk than previously assumed. Linda Davis Taylor, a seasoned investment professional and author of The Business of Family, advocates speaking to an investing expert who can help rationally guide your next move. This is especially important if you're approaching retirement -- or in the early stages of retirement -- and your portfolio's taken a severe beating in recent months. It may be worth reviewing your level of exposure to stocks with the help of a financial professional. 

"Human behavior and psychology play a big role in investing, and it is very difficult for most of us to act rationally about something as personal as money, especially in times of stress," Davis Taylor told me via email. "Someone who understands our situation but also brings an objective view to the decision-making can be extremely helpful in keeping us on track."

Overconfidence is overrated

Amanda Holden

Investors who believe they have the power to consistently beat the market are their own worst enemies, according to Amanda Holden, founder of Invested Development. "Overconfidence is detrimental. It is the original investor's sin," she said on the So Money podcast.

Holden started her career in investment management in 2008, right before the Great Recession when the broader market lost 55% of its value. Back then, some of her high-net worth clients panicked and sold their investments at rock bottom prices, locking in losses and missing out on the long rally that followed.

Today, Holden's focus is coaching clients through stock market volatility and showing them that handling the swings is critical for long-term success. "The nature of this world, of economic growth, is that it's always going to be cyclical. It never happens in a straight line. You don't get to participate in the upside if you don't hang onto the downturns, which are inevitable," she said.

Keep it simple

Ramit Sethi

New York Times bestselling author of I Will Teach You to Be Rich, Ramit Sethi, says investing shouldn't be complicated. Instead, sticking with a few simple principles is the key to long-term market success. They include: diversifying your portfolio, selecting low-fee funds and limiting your attention to how well (or poorly) your investments are doing. "If you're investing for the long term, you only need to check your investment accounts once per month at most," he said in an email. 

Sethi's advice stems from his own personal experience -- losing money in the market after picking individual stocks. "When I was in high school, my parents told me that if I wanted to go to college, I would need to pay for it with scholarships. The best scholarship I got was an award for $2,000. The organization wrote a check directly to me. I took it and invested in the stock market and immediately lost half my money," he wrote. "It taught me I wasn't as smart as I thought I was. I discovered almost nobody consistently beats the market, so pick low-cost, long-term investments and move on with your life."