Inflation is starting to really heat up now, folks. In the US it’s almost 7% but don’t think that we Brits aren’t immune! It was only a couple weeks’ back when our level of inflation was half our American mates but now, inflation in our land has hit 5% and is projected to hit 5.5% early next year. I don’t even want to know the US’ estimated inflation figures for 2022. That’d be too painful. Read here what you can do to protect your money from inflation so that you don’t lose your precious purchasing power.
Inflation can be boiled down to two things. Supply and demand. And right now, we have demand rising. So much so that supply can’t keep up. There are major shortages which means there are fewer goods going round. If this isn’t bad enough, we’re also experiencing a real lack of workers. Yet another shortage to add to the mix! All this means that there aren’t enough workers to produce all our stuff sending prices to a place we’d rather not visit. Read here where all the actual drivers of our economy have gone to and why it’s exacerbating all the inflation that we’ve got going on.
So what we’ve got is supply that’s stuck in some serious jam and demand that keeps on rising. Nothing can seem to stop it. Read here why record-high inflation ain’t stopping these shoppers! Except raising interest rates, of course. Now that could take some of the heat off. After all, that’s what those tools are there for. To be used when needed.
Bringing interest rates from rock-bottom to slightly-less-than-rock-bottom can hopefully help quell all these inflation miseries. Read here what an interest rate rise means for your finances and 4 tips on how you can best prepare. The thing is, most central banks (ahem, the Fed) are too scared to raise interest rates. They’re worried that doing so will not be good for the economy. More like stock market.
So they’re trying to hold off for as long as they possibly can. But we’re stretching it here. The IMF is pushing the Bank of England to raise interest rates saying that inflation is running dangerously high (which it probably is) and that they’ve gotta act fast. And they did. Read here why the Bank of England took the plunge on a rate rise.
So, inflation is now well beyond 5% which means our purchasing power is declining. And fast. All this means that growth stocks no longer look as attractive as they once did. Since higher inflation raises the discount rate which, in turn, has the effect of reducing their valuations. Investors are gonna be thinking twice whether those steamy p/e ratios will still be justified. Something tells me they might not all be!
So, what exactly are investors doing with all this news?
They’re running toward inflation-protected assets. Faster than their legs can carry. Tips (treasury inflation protected securities) commodities, real estate, gold and now I guess bitcoin fits into this list too as a sort of digital hedge against inflation.
The thing is, if everyone goes running for the very same things, at the very same time, you’ll have missed out on first-movers’ advantage. Because by the time everyone buys these things, their prices would’ve already gone up and you’ll end up paying a premium for being a late-comer. But diversifying your portfolio (aka investing into many, many different kinds of assets not just the fashionable ones) can seriously help you avoid this problem that many investors are now faced with.
Your only free lunch
When it comes to finance, they say there’s no free lunch – apart from diversification. No such thing as a free lunch means things that appear to be free will always have some hidden or implicit cost to someone, somewhere even if it’s not the person receiving the actual benefit. But diversification gives you all the benefits (aka lower risk) with zero costs. So what should you do? Eat this meal. Now!
The thing is, had all these investors’ portfolios been properly diversified, they wouldn’t have needed to scramble for hedges against inflation to protect themselves (and their dosh). They would have already been invested in real estate. In commodities. In Tips. And in gold. Physical or otherwise! They wouldn’t be losing their heads right now as we’re grappling with some sort of monstrous inflation. The kind that we’re worried will really stick around. And the kind we haven’t really been used to.
Look around
Diversification means investing across assets (real estate, stocks, bonds, cash) across continents (Asia, North America, Europe) across sectors (mining, energy, pharma, tech) and across size (large caps, mid caps, small caps). If you have all this, then you’ll be way calmer than a whole bunch of investors right now. Since you’d already have exposure to these inflation hedges. You’ll practically be as cool as a cucumber.
I invested into REITs (real estate investment trusts – property companies that are listed on the stock exchange) a few months’ back. And boy am I glad that I did. They held up pretty well while some of my tech exposure took a tumble. I had also bought a mining trust (which, until recently had gone totally sideways) but it pays a dividend. And now, it’s my umbrella. From the rains of inflation.
So if you don’t wanna get drenched, diversify your portfolio. Don’t bet on one single outcome. Bet on them all. ‘Cause that way, you won’t be constantly re-arranging your portfolio. Buying this, selling that. And you can never time markets. So, to safely sleep at night (without waking up to check where markets are at), diversification is your best bet.
Be sure that your portfolio is prepared for anything that comes its way. Like that Swiss army knife you keep in your back pocket. Well, since my Dad’s Swiss, they’re a staple in my house!
So get diversifying. It’s never too late.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 