Investing and inflation

Many investors are concerned about inflation and, more so, how to tackle investing and inflation.

It is a well-known fact that inflation affects all aspects of the economy.

Inflation is a general increase in the price of goods and services in the economy, which basically means your dollar has less purchasing power than it did before.

Recently, Australia’s Treasurer told the country that we were headed towards a rate of inflation higher than it has been in four decades – with experts warning that as inflation soars, so too do interest rates.

So where does this leave investors?

Understanding inflation is crucial to successful investing because inflation has the potential to erode the value of investment returns.

Knowing about the factors that drive inflation and how it can impact your portfolio is essential for all investors as the inflation landscape continues to shift in Australia.

As far as inflation is concerned, we’ve had a period of relative calm in Australia for quite some time… until recently.

Put simply, inflation is a matter of basic economics, and it is impacted by the core tenets of demand and supply.

As the economy grows, so too does the demand for goods and services, but as the supply of these goods and services struggles to keep pace with demand, producers ‘inflate’ their prices.

And inflated prices mean inflation!

This immediately impacts consumer spending, because your dollar simply buys you less than it used to, and everyone feels the tug on the purse strings when that happens.

Creditors also begin to lose ground because they’ve lent money when the value of it was higher and are now set to get it back when it has lost some of that value.

In that way, debtors can gain from inflation, because they are essentially repaying creditors with money that is worth less.

It’s complex to understand, but moderate inflation can actually signal economic growth.

However, a sustained rise in the overall price of goods means the economy becomes overheated and the impacts of this are seen across more than just consumer spending, such as:

Employment rates
Tax policies
Interest rates
Business investment
Government programs

It is still possible to make profitable and smart investments during times of high inflation, but it is not likely the time to execute a DIY strategy in this realm because inflation will, inevitably, change the way you manage your investments.

For beginner investors in particular, periods of high inflation can make the transition from saving to investing difficult, because hard-won savings are worth less than they were when inflation wasn’t as high – a tough obstacle to overcome.

For already established investors, inflation also poses some upfront difficulties, given investment returns are also worth less than they were before the rise in inflation.

No matter what type of investor you are, inflation will impact your investment goals and strategies, and this is something you will want to discuss at length with your trusted financial adviser.

So, are there any ‘better’ or ‘safer’ investments during times of high inflation?

Is there a such thing as inflation-hedging assets?

As always, a diversified portfolio gives investors the best odds over the longer term and can cushion the impact of a high inflation rate for many investors.

Diversification lowers your investment portfolio risk overall because your exposure to different investment types is limited – and one can often balance out the other in times of high inflation or interest rates.

Real estate is a popular investment option during times of inflation, because although the purchasing power of the dollar is lessened, rent prices usually increase in line with the increase in the price of all goods and services.

Investors also often turn to commodities as inflation causes a rise in the value of certain assets, with precious metals such as gold and raw materials such as oil or copper often in the spotlight.

As always, the best investment for you in times of high inflation will be dependent on your personal circumstances and your investment goals.

Discuss with your financial adviser how maintaining diversification is only part of the equation and must be coupled with the know-how to rebalance your portfolio as the economy changes.

The good times don’t last, but nor do the bad times, and eventually, the rate of inflation will peak and then subside again.

The important thing is being prepared and ensuring your investment portfolio has enough wiggle room to withstand changing economic conditions.

A few tips for weathering tough economic times include:

• Keeping emergency savings

The quintessential ‘rainy day’ fund is a necessity in the event of unforeseen circumstances, both economically and personally.

• Avoiding blanket recommendations

There is no one size fits all approach to investing or gaining financial security, and avoiding any blanket recommendations that state otherwise is always good advice.

While it’s important to remain educated during times of economic turmoil, it is also best to seek advice from those in the know before you make important financial decisions.

• Expect change to happen

It often feels like, just as you get your investments where you want them, something changes that makes the path towards your goals seem less clear.

Change is inevitable, both in your personal life and within the wider economic landscape.

Expect change to come along and change things up during your investment lifetime and keep an open mind about what the road to your financial future might look like.

One thing is for sure, you don’t want to go it alone as an investor during historically high inflation.

We have established how inflation can touch every aspect of the economy, and the way it intersects with your personal situation will be unique in itself.

At First Financial, we help our clients to realign their goals as their own circumstances and the overall economic landscape changes.

We understand that investment goals change throughout life and our team has experience in assisting clients to achieve their financial goals in any environment.

For more information about how to manage your investment during times of inflation, contact us today.