Okay, you have invested your money or you are thinking of investing. Now, over time, you also want to reap the benefits of that investment. So that means making money and preferably not losing money. However, the ghost of inflation has been haunting the economy and stock markets for some time, making them volatile. You hesitate and think: what to do, What are good investments in times of inflation?
We list some smart siege options.
Please note that this is not siege advice! We also assume a moderate inflation increase of 2-3%
Investments in times of inflation
Inflation is measured each month by CBS and reflected against the same month a year earlier. Inflation is measured by the consumer price index. This is the price trend of a package of goods and services as purchased on average by Dutch households. In the current inflation of 2022 figures, energy and fuel weigh very heavily. If you leave it out, then inflation is 6.9%, Which is more than what governments are aiming for: 2%.
Investing in times of inflation
Sometimes you see happen that in times of high inflation, many people tend not to invest, but keep the money “safe” in the savings account. But even in these times (or rather, precisely in these times), investing can’t hurt, as long as you do so with money you won’t need for a long time. So you need to make sure that you have enough money “left over” to cover even an increase in the gas bill, for example, without touching the money you put into investments.
But if you are going to invest, what are “good” investments?
Possibility 1: precious metals.
Gold and silver, for example. The advantage of investing in precious metals is that it holds its value better than other investments. The disadvantage, however, is that unlike stocks or bonds, for example, no dividends or interest are paid. So what you see is what you get. Also, precious metals are not doing so well on a stagnant dollar exchange rate, stock market sentiment, political tensions and real interest rates. But in general, precious metals can be seen as a hedge against inflation.
Possibility 2: real estate.
Looking for a steady investment? Then surely real estate is your partner in crime. Real estate has proven to be a good hedge against inflation in the past, as real estate prices rise in many cases when there is inflation. Consider here, for example, leases that are linked to official price inflation via indexation. So both the property value and rental income rise with inflation. Moneymaker thus.
Please note that we are assuming an inflation rate of 2-3%. Should inflation continue to rise, it is precisely not interesting to invest in real estate. Excessive inflation (>3%) causes interest rates to rise which can make borrowing money very expensive. This then sometimes outweighs the revenue your property generates in rent.
Option 3: Shares.
You wouldn’t immediately think of it given our piece on inflation, but stocks can be giant interesting in times of inflation. Then look particularly at those stocks that have a certain dividend yield which is linked to the company’s growth forecast. These are shares of large and strong companies such as coca-cola or Unilever. These companies in times of inflation are in a position to raise their prices equal to inflation because consumers buy their products anyway.
Or what about commodity or energy-related stocks. With rising inflation, the demand for raw materials and energy often increases as well.
Read more about investing in stocks here
Option 4: Bonds.
We can be short and sweet about that: in times of inflation, we are not fans of bonds. Why? Simply, with bonds, the interest rate (coupon) and principal are predetermined. So when you buy them prior to the inflation rise, with a long maturity the upcoming inflation will take an increasingly large bite out of the coupons and principal and thus a lower inflation-adjusted return. And low efficiency, we don’t want that ladies.
If you still want to invest in bonds per se, then short-term bonds are more convenient.
If you want to make a smart inflation-proof bond move, then inflation-linked bonds are “a smart move. With regular bonds, then, you run the risk that the interest rate (the coupon) will always compensate for inflation to a lesser extent. Inflation-linked bonds are government bonds, which pay coupons just like regular bonds but these bonds also provide you with an additional payment based on the official inflation rate in the country of issuance. So basically a kind of protection against inflation, or protection against monetary devaluation. Mind you, getting in on time is ‘key’ here since with sharply rising inflation, this bond becomes wildly popular causing prices to rise and yields to fall.
Read more about investing in bonds here
Where can you invest in times of inflation?
If you choose to invest in the stock market, in stocks or ETFs, you can invest with parties such as DEGIRO and BUX Zero. If you want to invest automatically in widely diversified funds, you might consider Semmie, Brand Day Day or ABN Amro. See the differences between these parties here.
Some last piece of advice.
Investing is something you do for the long term, even when the economy and stock markets are volatile. Now that just means we will have times of joy but also times of throbbing armpits. Know how to put things into perspective in time, so keep your head cool and stick to the plan. For now, we ourselves are fans of investing in accordance with the three golden rules: long-term, very widely spread at low cost. Investing is never without risk, so take care of that buffer and not having debt. Never invest with money you can’t afford to lose! Promise? And if you are looking for some tools to create an investment plan, check out this article.
