Inflation is the investor’s worst enemy. Yet, there are many complex factors that can lead to an inflationary environment. Thus, as investors, you have to know the definition of inflation and the investing strategies to escape the threat and limit the losses.
Defining Inflation
Inflation defines the economy where most of the price of goods and services rise. Consequently, consumers’ purchasing power decrease. Inflation is measured by the inflation rate. Commonly, many people refer to inflation as the cost of living.
Investing Strategies to Keep Gaining Profit during the Inflation
Many people usually invest in their savings, such as mutual funds, hoping that they can beat inflation. The fact is, however, burying your money in your backyard or in your piggy bank will not safe you from inflation.
The cost of everything will continue to grow while the value of your money does not.
The best way people can do to beat inflation is by investing in a combination of stock and bond mutual funds (to achieve more than 3.20% return averaging).
Hedge Strategies
Inflation can be a good thing for investors. Even many Economist refers to healthy balance inflation as a “Goldilocks Economy.” That is because its balance is right for investment and consumers activity.
The healthy balance inflation is when the inflation rate is average to below average. For instance, a 3% or less inflation rates when the economic growth is 3% or more.
In that environment, the stock prices can go up, while the bond prices are steady. Consequently, there is no need for an outside requirement like monetary or fiscal policy.
During this period, generally, investors prefer stocks to bonds. If the inflation rates go above the goldilocks level (2% to 3%), the country currency may fall. Thus, the foreign stock funds can be the automatic hedge since the money invested in foreign currency means more of the country currency at home.
The Tips on Investing during Inflation
You have to always try to navigate the market and economic condition by using the investment strategies. For many investors, having a diversified portfolio of mutual funds is the best strategy for most of the market and economic environment.
