Investment Strategies to Beat Inflation

No one needs to tell you inflation is high at the moment.

Rising fuel prices, higher household expenses, interest rates, and taxes have driven the current 17% headline inflation rate.

This is making life difficult for everyone.

The inflation rate is at its highest level in 30 years.

As a result of typical salary increases falling behind inflation, consumers are getting less value for their money.

Savings account holders lose out because high street interest rates are far below the current inflation rate.

By putting their money in bank accounts, people are losing money, according to all of this.

Inflation devalues money, but you may find ways to preserve or even grow your capital.

Utilize our guide to learn how to combat inflation.

What is Inflation and Why Does it Occur?

Inflation is the rate at which the prices of goods and services in an economy rise.

It happens when prices rise due to rising manufacturing expenses, which include the cost of labour and raw materials.

Because people are willing to pay more, increasing demand for goods and services also contributes to inflation.

When rampant inflation takes hold, each unit of currency becomes less valuable.

The consumer pricing index (CPI) quantifies inflation, so faster CPI changes lead to higher inflation levels.

Inflation occurs when money supply increases faster than the economy produces goods and services.

As a result of this excess of money, price levels rise.

Read: Impact of Inflation on Your Investment Portfolio

How to Invest to Beat Inflation

Some assets fare better under inflation, known as inflation-resistant or anti-inflation assets.

Even when the value of the wealth is eroding, they store and protect it.

Invest in gold

Many people view gold as an “alternative currency,” especially in nations whose local currency is losing value.

Gold is thought to be a hedge against inflation.

When a nation’s currency fails, gold becomes preferable because it retains value as a tangible asset.

Gold receipts, in which goldsmiths kept the commodity for local residents, are the first type of credit banking.

Each member received a paper receipt that could be redeemed later when they deposited gold.

However, before you start investing your entire life’s worth of savings in gold, you should know a few more things.

Physical gold investments reduce earnings due to storage and insurance costs for coins and bullion.

Investing in gold-focused mutual funds and ETFs can lower these costs, but gold’s price remains volatile, especially short term.

Check whether your chosen fund aims to follow the price of gold or gold mining companies.

Although their profits may differ significantly, both can be respectable approaches to playing the gold market.

Read: Investing in Gold: A Safe Haven or a Risky Bet?

Invest in value stocks

Value stocks, which trade for less than what a company’s performance may suggest, are preferable to growth stocks in this situation (any share in a company that is predicted to grow at a rate above the average growth for the market).

Value stocks should offer higher returns because they are believed to trade for less than their worth.

Dividends are typically not paid by growth stocks.

After adjusting, a company’s revenues and profits should rise with prices, offering value stocks some inflation protection.

Given that equities frequently experience actual value decline, this would be more of a long-term strategy than a short-term one.

Read: How to Profitably Invest 1,000 USD in Times of Inflation

Investing in Real Estate Investment Trusts (REITs)

Companies that own and manage income-producing real estate are known as REITs.

They consist of a collection of property assets that distribute dividends to their investors.

Property values and rental income will increase along with inflation.

REITs offer high yields, and since a large portion of their dividends is treated as ordinary income, they are subject to higher taxes.

Rent and home prices typically increase quickly to offset inflation.

REITs are a common choice since many investors find real estate to be prohibitively expensive.

Achievable rental income has traditionally exceeded bank account interest rates.

It appears likely to do so in the future, even though it is unlikely to rise by the same amount as inflation.

Read: How to Invest With Real Estate Investment Trusts (REITs)

Investing in FGN bonds

FGN bonds are government-issued security designed to beat inflation.

The Debt Management Office (DMO) issues FGN Bonds as debt securities (liabilities) for and on behalf of the Federal Government of Nigeria (FGN).

The bondholder must get the agreed-upon principal and interest from the FGN when it’s due.

By purchasing FGN Bonds, you can temporarily loan the FGN.

Due to its backing by the federal government’s “full faith and credit,” FGN Bonds are regarded as the safest investments available in the domestic debt market.

They are, therefore, categorised as risk-free debt instruments.

They don’t run the danger of default, so you can be sure that your interest and principal will be paid as and when it’s due.

Avoid Investing in Companies with High Labor Costs

Companies that depend on their personnel, including those in the healthcare and retail industries, aim to raise pay during inflation to keep and recruit workers.

These increases seek to keep pace with rising consumer goods costs.

However, inflation spirals out of control as prices rise even further in response to rising salaries.

Additionally, most seasoned investors, including Warren Buffet, steer clear of such businesses because they need significant capital to survive during economic downturns.

Before selecting company stocks, research the organisation and comprehend how dependent it is on its workforce.

Aim to invest in businesses that don’t need a lot of capital to offset rising labour expenses during inflationary periods.

Conclusion

Even while rising inflation continues to be feared, there are steps you can take to protect your wealth.

Protecting your long-term purchasing power is only one of the many advantages of holding one or more of these asset groups.

You or your financial advisor can modify your plan to consider the inflation level.

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