When inflation hits, the prices of goods and services increase, and your purchasing power plummets, causing a rise in your standard of living. Like other economic situations, you can limit the effects of inflation on your finances and one of the best ways to do that is by investing. Embracing some investment vehicles can protect you from the effects of inflation. Contrarily, some investments aren’t ideal during inflation.
During inflation, you shouldn’t invest in assets with fixed; long-term cash flows like bonds, CDs, money market funds. Instead, consider cryptocurrencies, stocks and real estate.
Investments can serve as a hedge during inflation. While some investments can protect you from the effects of inflation, others cannot. In this post, we’ll be looking at the worst type of investments to make during inflation. And, of course, I’ll highlight some of the best investments to make during such a period.
Sectors That Benefit From Inflation
Worst Investments during Inflation
Before we look at the worst investment to make during inflation, you must understand what inflation is first.
If you watch the news frequently, take a peek at the newspapers, or keep close tabs with news online, you may have come across “inflation.” Inflation is commonly world used in the financial industry. Regardless, not everyone understands fully what this term means. If you are one of such people, here is a concise explanation of inflation.
Inflation is the fall in purchasing power of a particular currency over time. A quantitative estimate of the rate at which the fall in purchasing power happens can be evident in the rise of an average price level of a basket of selected goods and services in an economy over some time. The increase in the overall level of prices, often indicated as a percentage, means that a unit of currency effectively purchases less than it did previously. Inflation is synonymous with deflation, which happens when the buying power of money rises and prices falls.
The United States Inflation Rate:
Why Does Inflation Matter?
So why does inflation matter? Why should you be a little scared when the United States Central Bank announces an increase in the inflation rate?
You see, inflation matters because 0f the impact it has on the economy. As prices increase, what you can buy now will reduce over time. Being able to combat, or at least keep up with inflation and sustain the purchasing power of your money is one of the primary reasons to consider investing your money.
Consumers are scared of inflation as it affects costs and their standard of living. What about businesses? Of course, business owners care about inflation as well. They meticulously watch the price of raw materials that go into their products, including the wages they need to pay their employees. Inflation also affects taxes, government expenditure and programs, the level of interest rates, and more.
A low, steady, or expected level of inflation is deemed positive for an economy. It indicates growth and healthy demand for goods and services. As businesses generate more goods and services to meet demand, they need more hands, resulting in higher employment and wage growth. Those workers then buy things they need and want, and the cycle goes on and on. But, when inflation becomes too high or low, it becomes a serious cause for concern as it becomes difficult to keep supply and demand, along with economic growth, under control.
This brings us to the benefit of investing. Although you’ll earn interest from the bank on money stashed in your savings account, the interest rate you get usually won’t correspond to or even come close to beating the inflation rate. That is why it is wise to invest your money, if you can, to increase its value over time. By so doing, you can purchase the same amount of goods and services in the future. But, note that not all investments can protect you from inflation. To help you invest wisely, I have outlined the worse investments during inflation.
What shouldn’t you invest in during inflation?
Assets with fixed, long-term cash flows perform poorly when inflation increases since the purchasing power of those future cash flows decrease over time. Contrarily, commodities with modifiable cash flows (like property rental income) often perform better with increasing inflation.
So yes, you shouldn’t consider fixed-income investments during inflation. And if you are wondering what this is all about, here is an insight into fixed-income investment.
How to Prepare for Inflation at Home?
Fixed Income Investments:
Normally, investors purchase fixed-income securities like bonds, treasuries, and CDs because they want a stable income stream in the form of interest payments. But, since the interest remains stagnant on most fixed income securities until maturity, the purchasing power of the interest payments reduces as inflation increases. As a result, bond prices tend to dwindle when inflation is rising. So during inflation, be wary of government and corporate bonds, CDs and money market funds, and other fixed-income investments.
Example:
Say you buy a bond with a fixed interest rate of 2.3% per annum. When inflation hits and the prices of things increase, the interest rate on the bond remains. In that case, you expect the purchasing value of the interest payment to reduce even as inflation rises. You can protect your finances from inflation when you invest in investment vehicles that have an adjustable cash flow and not stagnant ones.
