The easiest definition of deflation is when the prices for goods and services are declining. In other words, deflation is the opposite of inflation. Investing during the deflation period still can be profitable, once you understand the concept and the right strategy.
What is deflation and why should we be investing during it
It is the term that defines an environment of goods and services declining prices. Don’t get confused with disinflation, a decrease rate of inflation.
Sometimes, deflation also called negative inflation since it happens when inflation is less than 0%.
Usually, deflation happens during recessions, at the times when the demand for goods and services declines. Consequently, the producers of that thing lower the prices to compete for fewer consumer dollars.
During extreme cases, consumers put off purchasing to anticipate further declines.
During the great recession in 2007-2008, the inflation rate fell below 0%. That brought declining cost of goods and services. That may sound good from the eyes of consumers, yet, that actually show lower demand, as the consequent of lower purchasing power.
Investment and Hedge Strategies
Since the prices of assets are falling, so, you have to avoid assets like gold, real estate, gold, cash, and stock. Good investments during this period include bond funds. Especially, the long-term bonds since the interest rates are also falling, resulting in the increasing bond prices.
Besides, certain sector funds that invest in defensive areas can also be a good investment. The example of those areas include health care and utilities, they are things people need regardless of economic conditions.
For instance, people still need to go to the doctor when the economy is declining. Thus, the stocks in these sectors will not decline as worst as other sectors.
Yet, the deflation period can still give some challenges for investors. Usually, the stock prices are falling along with the companies’ profits.
During this period, the best investment includes long-term bond funds, zero-coupon bond funds and also dividend stock funds.
Contrarily, investment types that probably not work in this period, include precious metals funds and money market funds.
