Personal Finance | Inflation
How To Survive When Inflation Hits
Because inflation occurs without our consent, we can use it to review our portfolio.
People are starting to feel as if they are not progressing in life, as if they are stuck on a hamster wheel no matter how many increases or cost-of-living adjustments they receive since everything is increasing.
For consumers, inflation involves increasing prices of products and services, as well as a loss of buying power if their income does not keep up with inflation, on the other side for investors it means investing part of their money in assets that profit from inflation or at least keep up with its rate.
Today we will discuss the concept of inflation, inflation traps to avoid, and how to profit from the upcoming inflation, we will also touch on ways that will help you to benefit from inflation for your wallet.
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The Concept Of Inflation
Inflation is defined as the overall rise in prices in an economy over a specific period.
Prices have been fairly constant in recent years when compared to other periods, for example, in the 1970s and 1980s, prices grew by 10% to 15%, and inflation has subsequently slowed.
Inflation rates ranged between 2% and 5% in the 2000s, and 0% to 2% in the 2010s, however, inflation has lately reentered the discussion.
Inflation was 5.4% in the 12 months ending in July 2021, one of the highest rates in many years, The Federal Reserve generally wants a low and stable rate of inflation of about 2%, which might reflect a growing economy.
How To Benefit From Inflation for your wallet
The following tips tend to do well during periods of inflation:
1) Cash is trash
Cash that remains on the sidelines will always lose value.
Cash is the worst investment to have during an inflationary time, many billionaires dislike keeping cash during an inflationary period.
The billionaire ray Dalio has been vocal about his dislike of cash, which is because, during periods of inflation, cash sitting in a savings account or your dresser dorm at home loses value every day, every week, every month, and, of course, every year.
2) Value Stocks
Value stocks are companies with high earnings compared to their present share price, they also have significant cash flows, which investors often evaluate while prices are increasing.
Stocks have a good chance of keeping up with inflation, for example, in inflationary times, high-dividend-paying stocks tend to be crushed like fixed-rate bonds.
Investors should concentrate their efforts on companies that can pass on higher input prices to customers, such as those in the consumer staples sector, on the other hand, growth stocks are more sensitive to increases in interest rates, which is a common monetary policy response to inflation.
Value stocks do better than growth stocks during periods of inflation.
3) TIPS
It stands for Treasury Inflation-Protected Securities.
TIPS are marketable US Treasury securities aimed to prevent purchasing power loss& have the advantage of periodic inflation adjustments, which conventional fixed-rate bonds do not have.
TIPS is considered by investors who are seeking capital preservation and purchasing power stability as part of their lower-risk portfolio segment, TIPS holders can also have confidence that their principal will be returned because TIPS are backed by the full faith and credit of the United States government.
4) Real Estate
Real Estate is one of the most effective wealth-building assets throughout human history.
Real estate is a highly financialized product, it’s closely tied to the financial market overall times of inflation, even though mortgages are less flexible than rental agreements, they have an advantage when inflation is high.
By purchasing real estate, you are protecting yourself from rising rents, like any other consumable good that tends to rise during inflation, your property is likely to appreciate, while the monthly mortgage stays the same.
This is the heart of building home equity.
Suppose you buy a house for 100,000$ & inflation this year is right around 7% according to CPI even though we all know it’s much higher than this in real life but let’s just call it 10, so we’ll say the consumer price index is 10 year-over-year, over time the house will have kept up with inflation if not gone up more in price making this home worth 100,000$ plus ten percent right.
Now keep in mind that there is no gain in purchasing power here because inflation is ten percent, and the house price increased by 10%, this is the same as if you received a 10 raise at work and the price of everything you buy in life increased by 10% due to inflation, this is a net gain of zero percent in purchasing power.
So, if you kept this 100,000$ in the bank instead of buying the house and using the leverage, you would have gotten eaten alive, causing you to lose purchasing power.
Savers are losers.
That is why real estate investors are often cash-poor and debt rich because inflation will help them to pay off their loans over time.
5) Unproductive Assets
These assets, such as gold, silver, and other precious metals, are not bad to own during an inflationary time since as the price of everything rises, these things should keep up with inflation in theory.
Gold has been an excellent protection against inflation for thousands of years, it has historically been proven to preserve wealth over time.
6) Commodities
When a currency is inflating, investors usually go to commodities.
Commodities are often used as inputs in the production of various end goods all around the world, some examples of commodities are oil, natural gas, maize cattle, soybeans, and so on.
Commodities do not pay dividends because they are uncorrelated to the traditional asset classes of stocks and bonds, it tends to move in the opposite direction.
Since so much money has been pushed into the system, you can see the rise of commodity classes exploding over the last year.
Here are some commodities ETFs:
· URA is a uranium ETF that has gained 42.4% in the last year.
· USO is an oil ETF that has increased by 70.55 percent in the last year.
During times of uncertainty, commodities are viewed as safe-haven investments.
Inflation Is An Opportunity
One of the most effective strategies to prevent inflation is to ensure that your assets are appropriately diversified and fully invested.
Money invested in equities tends to beat inflation, but investments in real estate, commodities, and TIPS can merely provide more diversification.
In general, whether it is temporary or permanent inflationary periods, you should review your financial situation and prepare for what may lie ahead.
Final Thought
Investing in yourself is the greatest way to hedge against inflation.
If you are the best at what you do, you will make yourself extremely valuable to others, because the benefit of being valued in a marketplace economy is that you can charge whatever you want for your services, & your customers will love to pay for it.
Following monetary policy & developing your critical thinking skills will help you to become a better investor.
Inflation has various effects, but the most obvious effect is it will reduce your purchasing power over time & the dollar will buy fewer products and services than it did previously.
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