Our expertise in finance comes from years of training, practice, and learning. Since we work with these principles daily, we might overlook that these concepts are not second nature to everyone. While some principles might seem straightforward, their prevalence is precisely what makes them easy to forget. These “common sense financial lessons” are the basics that should guide sound financial decisions, but they can be easily overlooked, especially during times of market volatility or excitement.
Let’s start with what’s on everyone’s mind: inflation. We’re all painfully aware that the inflation surge from 2021 through 2023 increased prices and stretched consumers’ dollars quite thin. While we’re seeing inflation ease as the Federal Reserve considers lowering interest rates, everything remains expensive. Furthermore, food and energy—where we often feel the effects of inflation most—are excluded from core inflation calculations.
The reality is that easing inflation doesn’t mean prices will return to where they were. Unfortunately, prices tend to stabilize at a new, higher level because inflation represents a sustained increase in the general price level of goods and services in an economy. Once prices increase, they typically do not decrease significantly unless there is deflation, which is rare and often associated with economic downturns.
Even when the Fed begins cutting rates, consumers aren’t likely to feel the impact in their wallets immediately. Coming out of the pandemic, consumers had excess savings and cash, so when they resumed spending, they paid higher prices without fully registering the impact of inflation. Now, consumers are exhausted by these higher prices. This will eventually lead them to rein in spending and increase savings. Until consumers feel “wealthy” again and can comfortably afford the higher prices, complaints about inflation will persist.
Next, let’s discuss reinvesting dividends. Generally, stocks are known for their potential price appreciation and ability to generate cash. However, portfolio performance is evaluated based on total return, which includes the reinvestment of dividends. For example, if you invested $10,000 in the S&P Index in 1998, by September 2022, appreciation alone would have increased your investment to roughly $155,000. However, if dividends were reinvested over the same period, the portfolio’s value would increase to about $329,000.
At Henssler, we recommend using dividends strategically. Instead of automatically reinvesting dividends into the same stock, we suggest allowing the dividends to accumulate as cash. You can then redistribute that cash to a different sector or security. This approach enables investors to take advantage of opportunities to buy undervalued securities, invest in sectors that align with the current economy, and maintain their target allocation.
These are just two relatively straightforward principles that investors can easily forget. Next week, we’ll take a closer look at understanding the recovery time needed just to break even, when times are good and you’re making money that you need to pay down debt, and the risks of buying investments you don’t understand.
If you have questions, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the August 24, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
