It’s easy to worry about your finances. All you need to do is walk to the nearest newsagent or open up the news app on your phone.

“Fears mount over health of UK economy after sharp sell-off in markets”

“UK inflation hits 40-year high”

“Call on Bank of England for 3% interest rate”

It’s enough to make any of us reconsider if we’re doing the right thing. But while it’s natural to be interested in market movements, history shows that keeping your nerve, staying the course and sticking to your plans are the safest ways through any uncertainty.

By far the biggest of the worries facing many of you is rising inflation. But are you right to be worried?

Should you be worried about inflation? After all, it’s bad for stocks

Hopefully you’ll have a large proportion of your pension and ISA funds invested in a diversified fund of global companies. It’s one of the most reliable ways to protect and grow your money over the long term.

But spikes in inflation, like we’re seeing right now, tend to be seen as bad for share prices. The same share prices that determine the value of your pension, your ISA, and your other investments.

Post-pandemic supply pressures, Ukraine and years of printing money have conspired to push up inflation.

There’s evidence to suggest that inflation is starting to calm down but the fact remains – it’s become more expensive for companies to produce goods causing prices to rise.

How consumers react to this depends on many factors (not least interest rate policy), but one outcome is that they choose to buy less. Sales drop, profits follow, growth prospects soon slow and share prices fall in anticipation.

So yes, on the surface it looks like inflation is bad for the stock market. But does that really hold true?

Past performance is no guarantee – but it offers hope

The theory is simple enough, and rightly suggests that higher inflation is bad for markets.

But sometimes common sense and expectations can be misleading. So it’s important to look to history.

Dimensional Fund Advisors conducted a study of the US Stock Market (S&P 500) over a thirty year period to understand the a correlation between inflation and stock prices:

The Real Thing

Annual inflation-adjusted returns of S&P 500 Index vs inflation, 1992-2021

What conclusions should we draw from this?

There  doesn’t seem to be any obvious trend here; inflation and US stock prices appear to act completely independently of one another.

In fact, the study showed that the stock market posted an average annualised return of 8.1% (after adjusting for inflation) over the same 30 year period. Go back almost a hundred years, to 1926, and the average return is 7.3%.

Even as inflation and market prices fluctuate, over time the stock market has delivered consistent returns.

Form is temporary, (asset) class is permanent

Despite the convincing narrative offered by the financial talking heads in the press, no-one can know what will happen to share prices tomorrow, next week, or next year.

What we do know is that the share prices of the world’s leading companies tend to outpace inflation over years and decades.

But to ensure that happens, you need to stay the course even when it feels very uncomfortable.

Let’s be clear. What’s happening right now is concerning. It’s ok to worry a little bit. But you should always remember that nothing is permanent. Take the right advice, keep faith in real assets like company shares and property, and always stick to your plan.

And remember – financial headlines are there to sell newspapers, not help you achieve your goals and financial independence.

That’s our job.

Past performance is no guarantee of future results.