HOW TO INVEST DURING INFLATION _ When inflation rises, it’s important to prepare for detours on the road to financial freedom. Your purchasing power may decrease, but not your profits.
Immediate and Long-Term Consequences of Inflation
- Decrease in seasonal unemployment
- Salary increase
- Increase in expenses
- Market downturn
- Price increase
- Increase in demand
- Decrease in supply
- Increase in interest rates
- Increased demand for goods and services
- Shortage of materials for goods in demand
- Lower supply and higher wages
- Firms raise prices when spending rises
Although many effects of inflation are immediate, they can also have long-term effects. For example, higher inflation today means that you may not be saving as much for your retirement. Does your financial plan assume interest rates of 2% or 3%? Will your financial plan still work if there is an inflation rate of 10% or more?
Saving €500 per month during a period of 2% inflation may not be the same as saving €500 per month during a period of 10% inflation. That €500 savings can be split between groceries, rent, mortgage payments, transportation costs, home repairs, or other expenses. That €500 in savings may be as little as €300 or €250, or even less, than before inflation.
How Inflation Causes Stock Volatility
Stock prices often decline during high inflation periods. With low unemployment rates, high inflation, and demand for labor, the labor market demands wage increases.
Wage and material cost increases can lead to market declines.Troubled or bankrupt companies can exacerbate market slowdowns.
How to Benefit from Inflation Surges
Some companies thrive during inflation. Lower overhead and higher profit margins, coupled with necessary expenses, create a recession-proof business model. Look to invest in these types of companies during inflation surges. Try to look at sectors such as energy and housing.
What Are Inflation Hedge Investments?
In financial terms, a hedge is a protection or defense against loss. Diversification is a type of hedge. Inflation hedge investments protect your portfolio against rising inflation.
Inflation hedge investments can include:
- Inflation-protected Treasury securities
- Real estate
Do not be afraid to add inflation hedges in a small percentage of your portfolio. Extra returns can accumulate over time and turn into larger gains.
Which Sectors Tend to Perform Well During Inflation Surges?
Think about the industrial goods and services you use daily. Utilities are essential. Food is another essential item. Remote work is changing the need for transportation to work. However, daily or weekly transportation is still necessary in some suburban and rural areas.
Food, utilities, and basic expenses require income. Banks tend to do well during inflation periods. People still need to store or borrow money in inflationary times.
What sectors tend to do well during periods of inflation?
Think about the industrial goods and services you use on a daily basis. Utilities are essential. Food is another essential item. Working from home changes the need for transportation to get to work. However, daily or weekly transportation is still necessary in some suburban and rural areas.
The necessities of food, public services, and basic expenses require a certain income. Banks tend to perform well during periods of inflation. People still need to save or borrow money during times of high inflation.
What should you look for in an investment opportunity during an inflationary period?
- It is inflation-proof.
- It is scalable.
- It is a necessary expense.
Look for investments in goods and services that people still buy or use in moderate to high inflation.
Investments that have significant economies of scale and are daily expenses for most people can help you make profits in the face of increasing inflation.
These investments should be made in sectors that make profits in both high and moderate inflation periods.
Investing in real estate during inflationary periods
In times of inflation, rent and mortgages still need to be paid, even by those living on a fixed income. Mortgage rates can increase. If property management and mortgages deter you from real estate, invest in real estate investment trusts (REITs).
Don’t forget crowdfunding or lending sites that also allow you to invest in real estate. Among crowdfunding sites, there is Raizers.
Investing in Value Stocks During Inflationary Periods
Aside from real estate, value stocks can provide a strong hedge against inflation. Banks continue to lend when inflation rises.
“Value” stocks appear to have a lower price relative to their earnings, sales, dividends, etc. It is this lower price that makes value stocks appealing to investors in this category.
Investing in Commodities During Inflationary Periods
Like real estate and certain value stocks, some commodities are essential even as inflation rates rise. Coffee is a good example of a staple item, as it is one of the few luxury items that most people can afford. In addition to coffee, even during inflationary times, everyone continues to eat food.
Our food system relies on wheat and corn. Homes need heating and vehicles require gasoline. Oil and natural gas are essential commodities during inflationary periods for most people. However, the growing popularity of electric vehicles means that the utilities sector should not be overlooked.
Investments that Protect Against Inflation
As you can see so far, a financial plan allows you to focus on optimizing your purchasing power during inflation.
Instead of worrying about the stock market and your portfolio, focus on rising prices and how to reduce your expenses. Investing in industries that survive and even thrive during inflation strengthens your portfolio on your journey to financial freedom.
When demand increases, companies that follow the inflationary trend hire more workers. On the other hand, when both demand and inflation decrease, layoffs can occur.
Similarly, companies that struggle to achieve higher profits may start laying off workers. These companies lose profits due to increasing material and resource costs, even if demand increases.
Inflation may seem scary and discourage you from investing. But did you know that there is an opposite of inflation? This is deflation. On the other hand, inflation is not as scary as it seems.
How Do Gold and Other Commodities Protect Your Portfolio Against Inflation?
According to some experts, gold tends to resist inflation in the long run. Other commodities – such as oil, metals, and agricultural products – see their prices rise during periods of high inflation. These are commodities that people often use, even daily.
I mentioned that coffee is a daily luxury that most people can afford. If I invested one euro for every euro I spend on coffee, I would probably recover my money or almost all of it! I have stockpiled coffee to deal with these rising inflation rates.
What are the advantages of a 60/40 stocks/bonds portfolio?
An asset allocation made up of stocks and bonds sits on a risk-return curve. The point at which risk increases as the proportion of stocks increases is close to a 20/80 stocks/bonds portfolio.
Therefore, an optimal portfolio seems to be around a 40/60 stocks/bonds portfolio, with a return percentage of about 9% and a risk percentage of about 9.25%.
A 60/40 stocks/bonds portfolio provides a return percentage closer to 9.6% and a risk percentage of 11.25%. Yes, stocks are riskier, but this additional 0.5% compounded return helps to fight inflation.
Why should you consider investing in REITs during an inflationary push?
Real estate investment trusts (REITs) are real estate investments with a non-interventionist approach. The hard work is done for you. In the world of real estate investing, REITs have many advantages:
- Residential and commercial diversification
- They have outpaced inflation in recent years.
- They are regulated
- No real estate management required
REITs are more liquid than rental properties. You can sell shares of mutual funds in REITs or exchange-traded funds.
REITs diversify real estate holdings by owning both residential and commercial real estate. Low- and middle-income individuals can invest in REITs rather than real estate.
Investments allow for protection against inflation. Using investments to protect against inflation is easier than you might think. Consider investing in commodities, sectors, real estate, or REITs to take advantage of high inflation.
Overall, you should stick to your financial plan, prepare for potential job loss, and keep your emergency savings ready. When thinking about your financial plan, add safeguards against inflation. Consider how CDs, stocks, real estate, commodities, and other investments fit into your plan.
Understand that inflation is cyclical. Have a solid financial plan. Learn to make profits to mitigate uncertainty on your journey to financial freedom.