What Will Happen to Your Investments if Inflation Falls in 2024?
Inflation has reached new heights since the onset of the COVID-19. As inflation soared, banks and financial institutions raised interest rates as a means to attempt to stymie inflationary pressure. While inflation is falling in 2024, interest rates remain high, according to CNBC.
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The Federal Reserve intends to cut interest rates further this year — but only if it can be convinced that the nation will reach the 2% inflation rate target safely — per AP News. “We don’t want to have a situation where it turns out that the six months of good inflation data we had last year didn’t turn out to be an accurate signal of where underlying inflation is,” Fed chair Jerome Powell said earlier in March.
However, with falling interest rates come consequences for both saving and investing.
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Saving vs. Investing
Inflation ultimately leads to higher interest rates to borrow money. This also means higher interest rates on your saved money. While keeping your cash in a high-yield savings account is a hedge against inflation at the minimum, this no-risk method may result in smaller yields.
Investing can be much more risky, but with greater risk usually comes greater reward. The stock market historically yields sizable returns if you hold fundamentally solid investments for the long term. Quoted by Fortune, Alissa Krasner Maizes — founder of Amplify My Wealth, an investment advising firm — said: “While investing in a diversified portfolio representative of the entire market will likely yield a greater return on your investment than a high-yield savings account over time, there is also a correlating risk with that potential gain.”
If you’re younger and comfortable taking more risk, it could be wise to invest your cash in the stock market to grow your money for the future.
How Decreased Inflation Affects Your Investments
If you choose to leave your money invested in the market, inflation changes may have negative effects on the value of your investments. Although, the short-term effects of inflation on the value of your investments are likely to be much smaller than the long-term growth potential. No matter what, spreading assets (diversification) and making sure you’re comfortable with the level of risk you’ve taken is crucial.
Figuring Out Your Financial Priorities
When determining whether it’s best to save or invest, you’ll want to consider your financial priorities.
Are you looking to save up for a down payment on a home, or for the purchase of a new car in the near future? If so, putting money into a no-risk high-yield savings account could be the right move.
Are you looking to grow your money over time to reach your goal of fully retiring at age 60? If you aren’t concerned about the short-term effects of inflation and you intend to hold on to your investment portfolio, investing now might be smarter than putting your cash in a savings account.
Identifying both your short and near-term goals can help you strike the right balance between saving and investing, particularly during times of elevated inflation.
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This article originally appeared on GOBankingRates.com: What Will Happen to Your Investments if Inflation Falls in 2024?
