Inflation has always played a major role in the economy for both consumers and investors. It occurs when the prices of products and services increase, everything from houses to cars to consumer goods. Even while it may appear that inflation only impacts consumers, it has a significant impact on investors since their savings lose value.
The major causes of inflation include:
- Rise and fall of supply and demand of goods and services
- Production costs
- Policies and regulations
Inflation has an Effect on Investments
The immediate effects on investments may not appear to affect the investor, and you may think that the increasing prices benefit them. While this may be accurate depending on the type of investment, inflation does have an effect on their financial growth. In order to counter with the effects, investment returns must be equal to rising prices. If they are lower, investors begin to lose money.
So, there some ways to prepare yourself for economic changes that are currently happening. Being aware of the current financial situation and with the right financial advisor can help you make the right moves with your money.
Different Types of Investments
When inflation increases, assets with fixed, long-term cash flows have a negative impact because the purchasing value of such future cash flow decreases over time. Assets with adjustable cash flow, such as real estate end up preforming positively. When it comes to real estate, property owners can often increase rent payments when inflation happens because the prices of goods and services are up. Energy-related commodities like oil, industrial, and precious metals have a particularly strong relationship with inflation where they tend to rise in prices.
Keeping your money in a savings account will not secure your funds from the effects of inflation. A fixed income, like a retirement fund is the first to be impacted because you can’t buy as much that you previously did with the same amount of money. This is where savings can be of an assistance. You must ensure that you have a sufficient amount of savings that will last you a long time. Think of it more of a “backup” plan as well. Your savings will be able to meet expenses that your monthly income will no longer be able to cover.
Fixed Income Investments
Investors who want a more stable income stream with a good amount of interest, invest in bonds, treasuries, and CDs. However, the inflation does affect the interest rate negatively. Since the purchasing power of interest payments is still the same on most investments, goods begin to suffer as inflation increases.
Stocks are investments that tend to hold up well over time and against inflation . An analysis performed by the U.S. Bank Asset Management Group, reported that stocks have held up well against inflation over the last 30 years. However, this does not hold true for every individual stock. Every investor has to dig in and seek professional advice to make wise decisions. The inflation impacts the stock market at different rates, and thus some will perform better and others worse.
Financial Planning to Beat Inflation
Even though inflation is beyond our control, you can take actions that will help control your investments. Investors want to choose investments that will yield them a higher return when there is inflation that meets their financial goals. It is important to remember, the financial planning process will look different for every investor.
Speak with one of our financial advisors at Saddock Wealth to discuss the following strategies below.
Diversify your investment portfolio
- Every type of investment is affected differently by inflation. Depending on where you are on your investing journey, find ways to diversify into different asset classes such as real estate, commodities, stocks, etc.
- Stocks, bonds, and equity funds can potentially offer substantial returns on your initial investment. These are driven by the principle of compounding and can easily add increasing value to your invested sum.
Consider using TIPS
- The Treasury Inflation Protected Securities provide protection against inflation to your investments. As the inflation increases so does the principal and vice versa.
Establish a Secure Financial Strategy with Saddock Wealth
The current problem with inflation is going to impact everyone differently. Some investors are going to reap the rewards of their investments by charging more for their assets. While others will enjoy the boost due to long term investing. However, several individuals are going to be in a difficult situation because of the surge in prices and interest rates.
It is important to have a financial plan in place to guide you during this time. Let us help you manage your portfolio before you get hit by the negative effects of inflation. Our financial experts are here to help you with your investment portfolio and much more.
Saddock Wealth guarantees a solid plan and guidance to help you reach your financial goals! Contact us today!