While hundreds of thousands of investors pay close attention to the micro-movements of the stock market, the forex markets, or even the commodities that they’re invested in, very few look at long-term trends and pictures that relate to their investments. It’s a strategic hole that’s been the cause of many lost fortunes, particularly during the last four-year period, and the recession that engulfed it.
It’s the cause of lost investments in the stock market – often investments that were made in small companies with no expectation for realistic and stable growth. It’s the reason for so many trading failures with global currencies – often currencies that were rushed into with a great deal of quick analysis for their own movements, but little thought for how they’re affected by the global market.
In short, many people make investment decisions by looking at micro-events, rather than the more important macro-events that relate directly to them. One of these mistakes is looking at tiny points of change in a market rather than the forces driving them – looking at interest rates, for example, in place of the inflation and other market conditions that make them relevant or irrelevant to you.
In this guide, we’re going to look at how you can invest strategically during periods of high overall inflation. As one of the most influential macroeconomic factors for investors, leading about how an increase or decrease in inflation can affect your investments is vital. In many cases, it can be a key difference between having highly successful investments, and seeing your investments quickly fail.
Generally speaking, inflation hurts those holding cash the most. While the recent crash on global stock exchanges benefited those with excess cash reserves – as they were able to buy up cheaper-than-usual assets – a gradual decrease in currency value only hurts those that hold it. This is due to their purchasing power dropping, and the cost of items and commodities relatively increasing.
This means that investors who have opted for secure and stable investments such as Treasury bills and certificate of deposit accounts may find that their money, while safe from major losses, isn’t an appreciating asset during times of inflation. In fact, it’s often the case that inflation wipes out all of the earnings made by a certificate of deposit account due to the relatively lower value of the cash.
This is also the case for savings accounts, money market accounts, and other low-return yet fairly safe cash-based investments. As the forces of inflation drive the value of money downwards, any investments made in a net gain in sheer financial (cash assets) terms are likely to be lessened, and for many investors operating with relatively low returns, wiped out entirely due to value decreases.
Historic data exists to back this point up, and rarely differs from it during periods of peak overall inflation. There has yet to be a single period in United States history where a high-inflation period produced stable, positive returns for investors in CDs and Treasury bills. On the other hand, many have lost money overall through these ‘secure’ investments during periods of very high inflation.
You may be thinking that the stock market is a viable option – a strategy for hedging against the all-too-powerful forces of inflation. Unfortunately, it rarely is. In periods of high inflation and low total corporate performance – such as the recession we’re unfortunately facing now – the stock market is a generally weak investment option, producing mediocre returns and frequent investor losses.
On the other hand, however, many companies are born during these periods that go on to provide a great return for their investors. Due to the overall poor performance of stocks, it’s best to take a fine approach to the stock market during periods of high inflation, picking out individual stocks to use as investments, or even individual high-growth companies, rather than indexes and tracking funds.
There are, however, many investments that tend to fare quite well during periods of high, or even moderately high inflation. Commodities, such as grain, rice, sugar, and other key ‘needs’ are rarely low performers during periods of high inflation. Many experienced investors use commodities as a hedging strategy against inflation, allowing their cash-based investments to absorb their losses.
Likewise, international investments can be a smart choice, as many overseas markets are unaffected by the inflation occurring in other markets. Many investors are now looking at high-growth markets for their investments, most of which are found in developing countries. These investments, despite a relatively high risk factor, can produce massive returns that are often unseen in domestic markets.
Housing is another worthwhile choice, particularly for those with strong knowledge of the national and local housing markets. The housing and property market is cyclical much like any other, and an investor that understands its ups and downs can hedge against inflation effectively. However, it’s not a risk-free strategy, as drops in property pricing can occur during periods of high inflation.
Inflation is an annoyance for many investors, but it’s one we all need to live with, particularly in the upcoming decade. While it can make or break investments, it’s a force that can be worked around in many cases, largely by hedging against it with non-cash investments and assets. From commodities to property, there are plenty of ways to secure yourself and your money against strong inflation.