Investing in Inflationary Times

It's a well know fact that the money that you hold today will not buy you the same value of goods or services in years to come. The reason? - inflation. Inflation measures the upward movement of prices in an economy over a specified period of time and, as an investor, it is vital to consider investment strategies that "hedge against" inflation wherever and whenever possible.

To bring perspective to the problem faced by today´s savers, in an environment when cash is bringing zero interest, inflation of 4% a year reduces the real value of €100,000 to €82,193 in just 5 years or €67,556 in 10 years.

The US is posting inflation figs of 5,4% and the UK is already over 3% - and the recent increase of 0.9 percentage points is the largest increase ever recorded in the UK Government´s CPIH National Statistic 12-month inflation rate series, which began in January 2006.

Tried and tested investment strategies, such as the traditional 60/40 equity/bond portfolio, are clearly better than holding cash, but sometimes less effective during periods of high inflation. At these times, a change in investment strategy may be a prudent consideration, especially if a period of continued inflation is foreseen.

Shifting the emphasis of a portfolio to include investments in technology and consumer goods often pays dividends. This is because an upward trend in the price of consumer goods is invariably accompanied by a rise in the raw materials that are used to create them; such as gold, silver, oil and gas.

However, it should be noted that focusing solely on any one commodity may have risks. For example, gold has only risen two thirds in value during times of historical inflation. Therefore it may be considered wise to spread investments across various commodities in order to best maximise returns. Of course investing in stalwarts such as real estate should also be considered, as property prices invariably appreciate during inflationary times. Collectibles such as stamps, art and wine may also perform well.

As we all know, any investment carries risks and investing during inflationary times is no different. The primary risk is that the inflationary period is not sustained, as without inflation commodity prices often tend to remain stable.

For the investor who prefers to err on the side of caution, other strategies exist that include holding assets which have recently risen in price on a relative or absolute basis. Known as "Momentum Investing", this strategy generally carries less inherent risk and has worked historically during periods of both high and low inflation.

Whichever strategy an investor chooses to follow, the fundamental question remains as to what the recent run in prices actually means. Today we must consider whether inflation is simply normality beginning to resume in a post COVID world or the start of something more protracted. History can guide us on how to invest during inflationary periods but we must also try to understand how long inflation will last and how high the inflation rate is likely to rise.

Investing with AI Wealth

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