Last Updated on August 1, 2022
It is not necessary to inform you that inflation is high at the moment. It won’t have passed anyone’s notice that rising fuel prices, higher household expenses, interest rates, and taxes have all contributed to the current headline inflation rate of 17%, which 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 are losing out tremendously since high street interest rates are far below what inflation is now running at. By putting their money in bank accounts, people are losing money, according to all of this.
Money loses value due to inflation, but there may be ways for you to keep or even add to some of your capital. Utilize our guide to learn how to combat inflation.
What is inflation and why does it occur?
The rate at which the prices of goods and services in an economy are growing is known as inflation. It happens when prices rise as a result of rising manufacturing expenses, which include the cost of labour and raw materials. Because people are willing to pay more, an increase in demand for goods and services also contributes to inflation.
Each unit of currency becomes less valuable when rampant inflation takes hold. Since the consumer pricing index (CPI) is used to quantify inflation, inflation levels will be higher the faster the CPI is changing.
According to a well-known idea, inflation happens when the amount of money in circulation increases faster than an economy can create goods and services. Price levels rise as a result of this excess of money.
How to invest to beat inflation
While there isn’t a foolproof strategy for combating inflation, some assets fare better than others under pressure and are referred to as inflation-resistant or anti-inflation assets. Even when the value of the wealth is eroding, they store and protect it.
Invest in gold
A lot of 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 own currency has failed, it is preferable to use gold since it is a genuine, tangible item that retains its worth.
Gold receipts, in which the commodity was kept by goldsmiths 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, there are a few more things you should know.
Your earnings will be reduced if you invest in physical gold because there are extra expenses associated with storing and insuring coins and bullion. Even while these expenses can be significantly decreased by investing in gold-focused mutual funds and exchange-traded funds (ETFs), it’s still vital to keep in mind that the price of gold is quite volatile, particularly over the short term.
You should also be aware of whether the goal of your chosen fund is to follow the price of gold or rather gold mining firms. Although their profits may differ significantly, both can be respectable approaches to playing the gold market.
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).
This is due to the notion that value stocks should offer a higher return because they are believed to trade for less than they are actually worth. Dividends are typically not paid by growth stocks.
Because a company’s revenues and profits should increase with price increases after a time of adjustment, value stocks offer some protection against inflation. Given that equities frequently experience actual value decline, this would be more of a long-term strategy than a short-term one.
Investing in Real Estate Investment Trusts (REITs)
Companies that own and manage income-producing real estate are known as REITs, and they consist of a collection of property assets that distribute dividends to their investors. Property values and rental income will increase along with inflation. High yields are offered by REITs, 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 and appears likely to do so in the future, even though it is unlikely to rise by the same amount as inflation.
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 are making a temporary loan to 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 and 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, as prices rise even further in response to rising salaries, inflation spirals out of control.
Additionally, most seasoned investors, including Warren Buffet, steer clear of such businesses because they need a significant infusion of capital to survive during economic downturns.
Make sure to research the organisation and comprehend how dependent it is on its workforce before selecting company stocks. 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 take into account the level of inflation.
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