There is little doubt prices are on the rise. Oil, wheat, corn, metals and more have recently surged in price. The housing slump does balance things out for now but in time we’re bound to feel inflation’s sting.
Inflation simplified is increase in prices for popular commodities. This price increase devalues each dollar and as a result devalues our earnings and investments. Each dollar can buy less.
How do we protect our money from inflation then? The rule of thumb is to invest in real assets. These assests’ value is not dependent, or is adjusted to price levels. Let’s have a look at some of the steps we can take to protect our money from inflation:
#1 Change the mix of our deposits to include price adjusted deposits
If we believe inflation is coming it is wise to make use of inflation adjusted deposits. These deposits yield lower returns but guarantee the value of your money. If we look at a deposit with a nominal interest rate of 5% and an inflation of 2.5% in the same year this deposit actually yielded only 2.5%. Saving in inflation adjusted deposits helps lowering your risk and exposure to inflation, even if it is sometimes at the price of lower returns.
#2 Invest in commodities
Commodities are goods traded in a stock exchange. Since real products are behind the exchange price levels are automatically adjusted for inflation. Investing in commodities straight forward can be dangerous. There are a lot of mutual funds and ETF’s out there who can help us diversify and lower the risk of our investments. In anyway, however, commodities are a risky investment.
#3 Invest in real-estate
Real estate is just that – Real. Real estate prices adjust to inflation since the real value of the property has no reason to change. Furthermore rent charged should also be adjusted to inflation as the real cost of living should not be devalued because of inflation.
#4 Invest in foreign currency
If we believe inflation will hurt our primary currency we can always invest in another foreign currency or a mix of foreign currencies (for diversification purposes) which we believe are less susceptible to inflation. By investing in other foreign currencies we can enjoy higher returns on investments and deposits with smaller risk of devaluation due to inflation.
#5 Invest in gold
Gold has always been thought of as a haven from inflation. Gold supposedly has a real value and will not be affected by inflation.
#6 Invest in stocks
Investing in stocks in times of inflation is tricky. The value of stocks represent value of firms and as such should be real. However, some firms hold significant liquidated assets and these are naturally susceptible to erosion. In times of inflation investing in value stocks is more recommended.