Investing During Inflation Times

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Investing During Inflation Times

Investing during inflation time can be rewarding, much as it is difficult because it wipes out your money value over time. Inflation is a term that describes an increase in the general level of prices that occurs over time. The Consumer Price Index (CPI) measures changes in prices and provides indications on how inflation affects consumer spending habits. Inflation has been under 2% for most of the past decade, meaning that many people haven’t felt its effects yet, but it’s important to be aware of what may happen in the future. Investing during inflationary times can be extremely profitable, but it’s also essential to understand why you shouldn’t panic when the value of your investments dips.

Understanding Inflation

During inflation, the value of your cash will decrease. This means that you won’t be able to purchase as many goods and services. If you could buy a bike for 500 dollars a few years ago, it will now cost you 600 dollars. This means that if you have had stocks of these bikes, your bank would be richer by 100 dollars unit.

Interest earned from your savings will also be worthless in the future. This is because inflation eats away at the purchasing power of your money. For example, if you have 1000 dollars saved up, and it earns an annual interest rate of five percent, you’ll have 1050 dollars in the account. This amount will only afford you less than it one year ago.

While cash may not be as valuable during times of high inflation, other assets will become more valuable. Investing in stocks and real estate are two examples of investments that tend to do well and worth investing during inflation.

Stocks

Their prices increase when there is a higher expectation for future profits. During periods of high inflation, companies can adjust their prices to match the increased cost of living. As long as investors believe that a company will be able to continue making profits, it’s likely that its stock prices will continue to rise.

Investors in stocks have two sources of revenue. Dividends and capital appreciation.

Dividends

When a company has operated for the whole year, accounts are audited and profits are declared. Dividends are the amount of cash paid to shareholders out of profits.

Capital appreciation

Shares of listed companies are quoted at market value. The value is determined by the market sentiments of buyers and sellers. If the perception is positive, then the prices value of the stock will go up.

Real Estate

This is another good investment option during times of inflation. When the standard of living increases, people are more likely to want to buy homes. This drives up the price of real estate and results in higher returns for investors.

For decades, the prices of real estate have been on an upward trajectory. This has been mainly due to the demand for housing and office space. Industrial growth has added to the demand for warehouses. There have been times when real estate bubbles have seen prices fall. But, this is rare. Investing in real estate is a good hedge during inflationary times.

Gold

Investing in gold is often seen as a safe bet by many investors, however, this isn’t always the case because gold prices usually increase with uncertainty on the economy. They can also drop if confidence improves.

Gold prices have generally been rising in the past decade. This is because a lot of investors see it as a safe haven during times of economic turbulence. Gold is also considered safe by governments. That is why you see many countries holding reserves in gold.

Start-ups and new technologies

Investing in start-ups and new technologies can also be rewarding. Investors who come in early take high risks. Companies are willing to offer generous value propositions at this stage to attract capital. These investments will appreciate in value as the start-up becomes profitable.

New technologies provide opportunities for growth, which will increase profits during periods of high demand. People that invested 1000 shares in Facebook in May 2012 spent about 40,000 dollars. Today, these stocks have a market value of 330,000 dollars.

Investing Strategy

The goal should be to have your money working for you, without necessarily loosing value due to inflation. Do you need cash or liquid assets ? Yes. Cash comes in handy to sort out day-to-day expenses and those emergency situations. But you have seen that cash keep loosing value by the day.

Your next consideration is cash alternative assets. Near cash investments should be next on the ladder. Stocks (also referred to as securities), are good investments in your portfolio. It is critical to diversify your investment in securities, even if you love that one company. Always have an eye to that gem that no one else has identified.

Real estate investments should be guided by a long term view. They are not quick to liquidate but appreciate with value. Consider the rental income that will be generated overtime and developments around. Consider any risks that could wipe away the value of your property.

Gold has remained as the most trusted hedge against inflation over the years. Demand for gold keeps going up, mainly from China and Asia. Governments also keep reserves of gold as part of their reserves. Mining of gold is becoming more expensive, even with technological advancements. This asset should be in your portfolio.

Cryptocurrencies have slowly gained attention. This is a very high risk asset class . You should only invest what you are happy to lose. You should never borrow to invest in cryptocurrencies.  Scammers have also reaped people off millions of money. That said, people have made crazy amounts of money in Bitcoin and other coins.

Understanding inflation will lead you to only one way. Investing. Your next consideration is where to invest and how. Investment strategy should consider your life fully. It should be able to take care of daily requirements, emergencies and your long term financial security. If you have a nerve for risk, then buy some cryptocurrencies. Treat cryptocurrency investments as expenses, just like that dinner expense. That way, in case they go south, you don’t suffer heartache.

What excuse do you have ? Invest during inflation, irrespective of the times.

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