Here's How 3 Investors Are Approaching the Stock Market During Record High Inflation

If you're stressing about investing during record-high inflation, you're not alone. But while inflation is at a 30-year high, there are still fantastic stock-buying opportunities for investors to take advantage of. In this segment of Backstage Pass, recorded on Nov. 3, Fool contributors Trevor Jennewine, Rachel Warren, and Brian Withers discuss how they're building their portfolios during this time in the market. 

Trevor Jennewine: Yesterday, all three of the major U.S. indices closed at all-time highs. Over the past year, the Nasdaq Composite is up 43%. The S&P 500 is up 40%, and the Dow Jones Industrial Average is up 34%. Those are incredible returns. If you add some historical context, it's even more impressive. Over the last 20 years on an annualized basis, the Dow's climbed 7%, the S&P 500 has climbed 8%, and the Nasdaq has climbed 12%. The returns over the past year have absolutely blown those figures away.

However, the Labor Department said that the Consumer Price Index, which is a widely used benchmark for inflation, the Consumer Price Index rose 5.4% over the past 12 months in the period ending in September. It's not a perfect gauge for inflation, but that figure of 5.4% is still significantly higher than the target 2% set by the Federal Reserve.

Now we've got global supply chains in a state of chaos, labor shortages, and all of those things are reducing output across various different industries, which could ultimately drive prices higher, make inflation even worse. Generally speaking, inflation tends to be a bad thing for the stock market because it tends to reduce the purchasing power the companies have, and higher prices tend to mean consumers buy less, and so then it negatively impact sales. So here's my question.

Given the extraordinary growth across all three major indices over the past year, then all of the turbulence that we see with supply chain disruptions and labor shortages, are you guys concerned about a market correction or even a market crash? Have you adjusted or do you plan to adjust your investment strategy in any way? Rachel, we'll start with you.

Rachel Warren: I love this question. I think to put it simply, I'm not worried about a stock market crash. I think, especially as a long-term investor, we know that these are events that do happen in the market. They are inevitable. You stay invested in the market for a long time, more than likely than not, you're going to encounter a few crashes or corrections throughout your investing journey.

But I think you look at the history of the stock market, which for example, you were mentioning those returns over a period of 20 years. What's interesting is looking back, I think over the last 50 years, there's been a crash or correction of some kind, on average about every two years. Now, obviously there hasn't been an actual market crash every two years. But it works out when you average these market events against the broader life span of the market. On average, the market has a crusher correction about every two years. These things are regular events in the market. These are not surprises often when they happen.

There's been signals in the market. I think it's possible there could be a crash or correction in the near future. But it's also just as possible that that could be much further down the line. I think investors are still, understandably so, a bit concerned after the events that happened in March 2020 with the market. But I think another thing that's interesting to point out is often following a crash or corrections, the market rebounds stronger than ever before.

I think you only have to look at the market events of 2020 to see a prime example of that during one of the worst crises we've experienced in modern history. I'm not concerned about a market crash. I think for me, I look at companies that I buy. I've said it before on the show. I am medium risk-tolerance as an investor, I tend to go for very established companies across the diverse range of industries and companies that themselves have very diversified businesses that can essentially do well in a wide range of market environments.

While it's possible that the prices of those companies could plunge temporarily if the market crashes, price in and of itself doesn't impact if you have a quality underlying business. I think for me, the takeaway here is, I know a correction could be in the near future. It could be weeks, months, year down the road. I think the most important thing is to keep investing consistently, which is what I do and intend to keep on doing. Keep investing in those businesses that you know, that you like, that you understand, that you believe in as quality long-term investments. If you have the capital to deploy in a correction when stock prices are down, put it to good use, to invest in companies that can provide long-term portfolio value.

Brian Withers: That's a great summary, Rachel. I would add to that, especially as you get closer to retirement, having money outside of the market for an emergency fund, and making sure that the money that you have in the market is money that you don't need for the next three to five years. That's the way I look at things is from if the market takes a step back, and my portfolio it's been crazy this year. It's been all over the place. I can go to sleep and sleep comfortably at night because I have enough cash to make it through and not have to -- the worst thing you can do is selling your stocks at an inopportune time and then you become this desperate seller and you take whatever the market is going to give you at that point.

Setting yourself up outside of your stock portfolio from a financial perspective is almost as important as investing regularly and making sure you have a consistent process to do that. Absolutely, corrections will happen. The way I think about it is having that cash cushion that I don't need the money that's in my stock portfolio. Short answer, I guess, or the long answer [laughs] is yeah, I'm not doing anything differently. What about you, Trevor?

Trevor Jennewine: I think those are both great answers. Then to add some context about what you just said, Brian, about corrections will happen. If you look at the historical data going back over the last 50 years or so, the market has fallen. The S&P 500 has fallen 10% about once every one to two years. Then it falls about 20% once every four to six years. In that context, we might be overdue, and I say that in quotes, for a correction. But I certainly don't know the future. I think it makes sense to invest on a regular basis. There's a Peter Lynch quote that I think speaks to this topic that I really like.

It's "far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." I think if you start thinking that you can time the market, you're going to miss out on buying opportunities. If you go back and look through financial news from 2014 through 2017, there are always analysts saying that the market had reached a peak, the bull market had to end with the exception of that very sharp drop in March 2020, the market has been strong for years now.

That could end tomorrow or it might be five years before we see a correction. I don't know. That's why I'm not going to make any changes. I plan to, like Rachel mentioned, buy those high-quality companies that can create value over a long period of time.