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  • Investing against inflation – READ THIS before you start!
  • Investing against inflation – READ THIS before you start!

Investing against inflation – READ THIS before you start!

Inflation and investing

It has been established for decades: inflation is one of the biggest enemies of investors. So-called currency devaluation not only ensures that you can buy less and less with the same money over time, but it also eats away at your return . For example, when you make profits, you always have to check whether you are making more profit than the current inflation. That is of course quite annoying.

Annual inflation averages more than 2% per year, with (recent) peaks of over 5%. High consumer prices can cause the stock market climate to deteriorate – resulting in falling share prices . However, this does not say it all. Because what does inflation actually mean for investors and with which investment products can you hedge your assets against inflation? You can read this, and more, in the article below.

What is inflation?

First of all: what is inflation? The word inflation has different definitions as such. When you hear it in a financial context, it usually concerns so-called price inflation. Your money becomes less valuable. This occurs when the general price level within an economy rises. There is no fixed theory about the causes of inflation and there is still a lot of discussion about it among economists. A widely supported idea is that inflation occurs when more money enters the economy, while there is a relatively low production growth. The increase in import and production costs also play a role.

For the economic and social effects of inflation, it does not matter what the exact cause is. When price stability is disrupted, it is the task of the banks to restore price stability to some extent. Interest rates are usually the instrument for this. If banks increase interest rates, less money will be in circulation and inflation will fall. If lower interest rates are used, this will stimulate the economy. Higher inflation will (sooner or later) be the result.

The effect of inflation on wealth

Inflation is seen by many people as something bad by definition. Because being able to buy less for your money is something negative, right? Assuming that you have sufficient assets with hardly any debts, this is indeed the case. Your assets will then be worth less in practice, because everything is more expensive. So suppose you have about €50,000 in the bank. Today, you can buy a ‘premium badge’ car with this. In about 25 to 30 years, however, you can ‘only’ buy a car of a less luxurious brand with this same money. Inflation can therefore ensure that you do not have less money (assets), but that this money is worth less in practice.

However, the opposite way of thinking also applies. Because if you have a lot of debt and therefore little wealth, you will be able to see inflation as something favourable. Your debts are then, as it were, worth less and that is exactly what you want. In general, you will want your debt to have the lowest possible real value. Of course, this is a simplified explanation of inflation, in which interest payments are not taken into account.

What to invest in when inflation occurs?

As an investor, you can make various investments that counteract or at least compensate for inflation. In English, this is called a ‘hedge against inflation’.

Precious metals

It may be a cliché, but precious metals are still a popular hedge against inflation. In the past, precious metals have often proven to be reliable partners in economically difficult times. For example, it often happens that the stock market falls, while the prices of precious metals actually rise. They are seen as safe havens in times of need. Of course, remain realistic. Precious metals also offer no guarantees and you do not receive any dividend on them. In addition, factors such as the dollar exchange rate, interest rates and politics can negatively influence the prices of precious metals. Read more about  investing in commodities  in our knowledge base.

Property

Investing in real estate is a profession in itself. You can’t just buy a few properties in Amsterdam through a broker. Investing in real estate involves a lot and you also need a decent starting capital. However, it has been shown many times that investing in real estate can provide you with a good hedge against inflation. This is partly due to the fact that real estate becomes more expensive when inflation rises. In addition, many real estate properties that are the object of an investment are rented out. Through indexation, rental agreements can protect the landlord against inflation. However, this is to the detriment of the tenant.

Shares

Are shares interesting to combat inflation? Yes and no. There are of course a great many shares. Some suffer greatly from higher inflation, while other shares are very resistant to it. In general, you look for shares with growth potential that are also linked to a reasonable dividend. However, this does not always apply.  Growth shares  are often less stable than value shares. Value shares often do not provide you with monster profits, but can ensure consistent and high dividends. You will already notice that it is not easy to say which shares are or are not suitable to combat inflation. It will be different in every situation, depending on the specific circumstances of the market. Read more about  shares  in our knowledge base.

Bonds

If inflation rises, the prices of outstanding bonds will often fall. This results in higher (effective) returns. Keep in mind that short-term loans can be more interesting under certain circumstances, because you can quickly reinvest at higher interest rates. In addition, there are also so-called inflation-linked bonds. With these bonds, the interest rate will be increased when inflation rises. Such ‘inflation bonds’ are often  government bonds . Certain investment funds focus purely on this type of bond. Read more articles about  bonds  in the knowledge base.

In conclusion

After reading this article, you will know that inflation involves a certain devaluation of money. This can be annoying for investors, because your returns are, as it were, depressed. As an investor, it can therefore be smart in times of higher inflation to look at investment products that counteract inflation, as it were. In practice, these can actually be all investment products, but some of these are just a little more suitable. Of course, it is always wise to do your own research. Market conditions are not always the same.

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