In addition to death and taxes, inflation is another phenomenon that we can almost certainly expect for a period of time.
The United States has actually experienced many brief periods of deflation, but overall, economic progress has been accompanied by inflationary pressures. When there are too many currencies in the system, inflation may occur, leading to higher commodity prices. Of course, if the two main sources of wealth created by a family-assets and income appreciation-grow at a rate equal to or greater than inflation, the negative effects of inflation will be offset.
However, as we have seen time and time again, this is usually not the case. While the minimum wage has increased, the overall price of goods has exceeded the average wage increase in recent years.
Inflation is often called the “worst tax” because most people don’t notice its impact. Suppose, with a 7% increase in inflation, earning 4% in a savings account will make many people feel 4% rich. In fact, their poverty level is 3% lower.
This is why both households and investors must understand the causes and effects of inflation and how to plan to ensure that their assets maintain purchasing power.
Here are three investment methods that everyone should consider to protect their hard-earned wealth from inflation.
Although inflation may not be as violent as the stock market crash, it is more destructive to your portfolio.
Invest in stocks
Although most people lack confidence in stocks, holding some stocks may be a good way to fight inflation. Think of your family as a business. If a company cannot properly invest its funds in projects whose returns are higher than costs, then it will also become a victim of inflation. The basic premise of business success is that companies will sell their products at rising prices, which will lead to increased revenue and earnings, and inevitably lead to a rise in stock prices.
Some of the best stocks to hold during periods of inflation are companies that can naturally raise prices during periods of inflation. Commodity Resources Corporation is an example. Products such as oil, grains and metals enjoy pricing power during periods of inflation. The prices of these items tend to rise. For example, the price of computers will rise with the price adjustments of manufacturers and distributors.
Nevertheless, price increases are not enough to withstand inflation. If a company’s expenses increase, price increases alone are not enough to maintain stock appreciation. This is why grocery stores may benefit from rising food prices, but they may also be affected by increased sales costs.
Seek to invest in companies such as commodity companies or healthcare companies that have the highest profit margins and usually the lowest production costs. Finally, never underestimate the value of dividends during inflation. Dividends increase the total return of the investment portfolio.
Real estate is always a good investment if it is for the right reasons (such as buying a house for self-occupation). The problem arises when the buyer’s goal is to sell the property they just bought for a profit. Although experienced real estate investors can discover the hidden value in the property, ordinary people should focus on buying a house and intend to hold it, even if only for a few years. Real estate investments usually do not produce returns within months or weeks; they require long waiting periods to add value.
As a home buyer, unless you pay cash, you are likely to deposit some money first and then take out a loan with the remainder of the purchase price, that is, a mortgage. There are different types of mortgages—fixed and adjustable rates are the most common—but the basic principles are the same. You pay off a small amount of principal every month until you have ownership of a debt-free asset, which should continue to appreciate over time.
If you get a fixed-rate mortgage, if interest rates rise, you will eventually repay future debts in cheaper currencies. But if the rate drops, you still have to pay a fixed amount. Various factors should be considered to determine your best mortgage option.
Like land, housing prices tend to rise year by year. Indeed, a real estate bubble is usually accompanied by a correction period, which sometimes causes the value of a house to shrink by more than half. Nevertheless, on average, house prices tend to rise over time, offsetting the effects of inflation.
Invest in yourself
By far, the best investment you can prepare for an uncertain financial future is an investment in yourself. A product that can increase your ability to make money in the future.
This investment starts with quality education and continues to maintain the latest skills and learn new skills that match the skills most needed in the near future. Being able to keep abreast of the changing needs of the company can not only help you resist inflation, but also resist a career in recession.