If you’re one of those who long for the good old days when the cost of goods and services were affordable and you had an ample amount of disposable income, you’re not alone. The sad thing is those good old days might never return so what do you do if you’re in a country where the cost of living keeps rising?
Do you want answers?
Let’s begin by breaking down what inflation does.
Inflation (rising prices) lowers the value of cash savings and fixed-income investments. If your money isn’t moving forward, it’s falling back. That’s due to inflation, which is almost always with us. Inflation is the term used to describe the steady rise of prices for goods and services that affects all areas of the economy. Over time, inflation can erode the purchasing power of your currency, and also chip away at your investment returns. But with some foresight and planning, it’s possible to protect your money.
The solution is investing for inflation – that means choosing investments that will give you a return greater than the current rate of inflation – or at least keep up with it.
If you’re not an economist, this might come as a shock to you. Inflation isn’t all bad because experts like to see a low, steady rise in prices. They say it means a healthy economy, meaning companies are producing, consumers are buying, business and employment and wages are all up.
However, while inflation impacts all investors, it’s especially tough on income-oriented investors.
Here are Warren Buffett’s top tips for beating inflation;
In general, returns on stocks beat inflation. Rising prices can mean more profit for companies, which in turn boosts share prices. No guarantees, of course, but over the long term, the stock market has historically provided returns that beat inflation. Passive index investing is the easiest way into stocks and doesn’t rely on an aptitude for stock-picking.
Commodities tend to have outsized returns during times of high inflation. Commodities are a type of real asset, things like crops, raw materials, or natural resources. Their prices go up those of other goods or services that use those goods. In particular, precious metals like gold and silver have long been considered an inflation hedge. Like physical assets, both gold and silver have intrinsic worth, unlike the dollar or other currencies. Other inflation hedges include energy commodities, like oil and gas.
Real estate is both a real asset and an appreciation-oriented one. Like commodities, land and property values tend to rise alongside inflation.
Tangible assets, such as fine art, vintage cars, and other collectables, also tend to work well as a hedge against inflation. Again, these are real assets that have intrinsic value to collectors. Although their prices can be hard to predict, the value of these items is expected to appreciate over time, providing returns greater than the inflation rate.
Note: Cryptocurrencies, like Bitcoin and Ethereum, may also protect against inflation because there is a cap on their supply. But since cryptocurrencies are so new, dating back to 2010, it’s not clear how they’ll perform during times of high inflation – they haven’t been around in that sort of environment.
Something important to note is that to make any investment, you have to consult a reliable expert or company. You can speak to your Banker/Asset Manger, who can direct you to the appropriate quarters.
Do you have comments or questions? Do share with us in the comment section.