2022 is the year of inflation. Granted, it started in 2021 because of the massive disruption that Covid caused in the world. But inflation is on everyone’s radar now.
After all, it’s difficult to have peace of mind during a period of high inflation. We haven’t seen this in the developed world for decades. And it’s highly uncomfortable if you’re facing higher prices for everything every single month.
You probably hear about the current economic problems every day, which makes it even worse. It’s all over the media.
- Inflation is still getting higher
- Stocks are down
- People are starting to get fired
- Companies are barely hiring
This is looking like stagflation: There’s high inflation and low economic growth.
Last week, a friend told me he’s been seeing investment ads lately. The ads claim they have investment strategies to generate amazing returns during inflation. Meanwhile, the most famous hedge funds (like Tiger Global) — which are armed with some of the brightest minds in finance — are down 60%!
If these “experts” are really making so much money from investing, they wouldn’t waste their time putting up ads. There are always people who try to profit from fear and greed. Don’t be seduced by them.
Look at the big picture
Remember the “Great Resignation” last year? People were handing in their resignations by the thousands and getting better-paying jobs. Well, now the media is saying the party’s over and economists claim inflation will remain high for a while.
When we’re faced with economic problems (or any problem), there are two ways to view things:
- Up-close perspective: Looking at inflation, interest rates, debt, consumer spending, joblessness, and so forth.
- Broad perspective: Looking at long-term trends and historical patterns.
You can get tunnel vision during periods of high stress. So I always suggest taking a step back for a broader view. What happened in the past can teach us about what’s happening now.
There have been periods of high growth and low growth. Like how the world went from the Roaring 20s to the Great Depression in the 30s and so forth. As the platitude goes:
“History doesn’t repeat; it rhymes.”
Howard Marks, a great investor, talks about this concept in his book, Mastering The Market Cycle. It’s the best book I’ve read on cycles and how the stock market behaves over longer periods.
Marks talks about how the economy grows, on average, at a steady pace. For example, the economy often gets stimulated (like in 2020) and people get more excited, take more risks, and start to consume more. This period of high growth often causes inflation. Then, things slow down again later.
It goes up and down. But we never spend time in the middle. Our economy and stock markets are at the extremes.
Recessions and slowdowns are normal. Despite the screaming headlines you see in the media or those “gurus” putting up shady finance ads.
Just look at the S&P 500 index. Since it started in 1957, we’ve faced many recessions and wars. And it’s still posting 10% average annual growth. But there were also years of nearly 30% declines, but also 30% rises.
When you invest for the long term, these fluctuations don’t harm you. Things only become problematic when you make bad investment decisions during periods of high growth. For example:
- You bought houses without income in the 2000s.
- Or you bought stocks and crypto with borrowed money over the last year.
So that’s what you want to avoid. When things are going really well and the economy is booming, try not to take too much risk. Avoid buying into things you don’t understand. Do that and you’re mostly covered from the bad impacts of low economic growth.
Focus on knowledge and mindfulness
The economy is affected by various factors. And these factors are mostly out of our control. So we can only look at ourselves and the things we can control.
We don’t want to get swayed by impulsive sensations. When you recognize the patterns we’ve talked about above, you’ll know that the current economic trends are normal, even expected.
This is where knowledge and mindfulness come in. That’s also why I’m writing my next book to help more people understand basic finance better.
You don’t need a Ph.D. to understand basic finance. It doesn’t have to be all theoretical too. Simply focus on the practical stuff.
Simply learn more about how the economy works and how stocks work. When you have better knowledge of the history of finance, you will feel more at ease. None of the challenges we’re facing are new.
Let’s take making money, for example. Too many people fall for too-good-to-be-true investments. That’s how people lose money on day trading. Or getting into speculative investments.
Instead, understand what you’re getting into first. The most accessible way to do that is to read books on personal finance and wealth-building that have stood the test of time.
Understanding the basics of how investing works is really the key to building sustainable wealth.
But knowledge about finance alone will not give you full peace of mind. You also want to practice some form of Mindfulness or Stoicism to detach from money stress.
We often spend too much thinking and worrying about the future. During times of financial stress, it’s really common to extrapolate.
- “What if prices keep rising forever?”
- “What if the stock market collapses and never recovers?”
- “What if I run out of money?”
The first two are not legitimate. In the developed world, inflation has always subsided on its own. And the stock market is still here.
The last one is real. If you spend more than you earn, you run out of money. So the goal of Mindfulness is to ignore money worries. The goal is to separate the useless from useful thoughts.
If you think, “I should probably spend less,” you’re fine. But if you think, “I think the world will end,” you’re being dramatic.
Practicing Mindfulness or Stoicism helps you to separate the helpful thoughts from the paranoid ones. If you’re into meditation, try Mindfulness. If you’re into reading, journaling, and thinking, try Stoicism.
It’s not the end of the world
My father and I started our laundry technology company during the financial crisis of 2008, which took a lot longer in Europe than in the US. The economy might’ve been bad, but people kept moving forward.
Sure, companies and people spent less. Work was hard. Companies went under. Stocks plummeted. But our company is still here.
I’ve always kept that mindset of operating a lean business. Sure, maybe we didn’t grow as fast as others. But we also don’t have much debt. That makes it more peaceful to operate the business.
When the economy is down, it’s easy to let your emotions take over: “This inflation will never end, currencies are going bust, the west is declining, there’s war in Europe, we’re next, people are getting crazier.”
Yes, life is harder and more complex. But we also have to be honest: Our present problems are not as bad as what people have gone through in the past. Life isn’t easy and it will not be easy in our lifetimes.
The important thing is to acknowledge that and keep moving forward.