Concerned about market volatility? Long-term inflation can also deplete your net worth.
In recent months the financial market has moved up and down like a yo-yo. There is little apparent correlation with factors that previously drove market movements. One thing is certain, though: investors often forget about the impact of inflation as they are highly immersed into the impact they are feeling with the stock market.
However, since the “new normal” started I, like most people, have become acutely aware of the rising cost of goods and services, in fact over the past couple of years every time I buy groceries or fill up my car with petrol, prices seem to be creeping up. These increases are even greater when it comes to utility bills or covering additional expenses for medical care. It is a bit of a head scratcher really, especially since service hasn’t improved and the products are no different, yet costs are rising.
So how do we address the effects of inflation? Especially since we cannot control or avoid it.
Firstly, inflation is defined as a rise in the general price of goods and services in an economy over a period of time, however what is more important to note is, over time inflation erodes money’s purchasing power.
The impact of inflation on your investments depends on the type you hold. If you invest solely in stocks, inflation should not be a major concern. However, in current market conditions, you should aim to be well-diversified and invest based on your risk tolerance and time horizon.
On the other hand, gradual inflationary increases put the most pressure on fixed deposits and fixed income investments. People on a fixed income feel the greatest pain because their income does not increase with inflation so, over time, it loses value and purchasing power.
The current financial environment offers very low interest rates for investing, i.e. less than 1% for a one year deposit; however, the standard rate of inflation is around 3%. Therefore, after a year, the interest earned on the money invested is less than 1%, yet inflation has increased by 3%, meaning that the purchasing power of the money locked away during that year is less than before it was invested.
How can you combat inflation?
- When you invest, seek returns/interest rates that pace above inflation.
- Be smart about your savings account. If your money is earning 0.25% interest and the inflation rate is 3% recognise you are losing purchasing power.
- If you have a variable rate mortgage, switch to a fixed rate if you can find a suitably low rate.
- Review your investments – including your pension – and make sure you are investing for the long term.
- Invest for long-term capital gains, as short-term investments tend to give skewed results and may not be that profitable.
Inflation is a fact of life. Managing your investments wisely is vital to ensuring that you benefit from long-term growth and that your returns pace above inflation.
– Carla Seely is the Vice President of Pension, Life and Investments at Freisenbruch-Meyer. If you would like any further details, please contact her at firstname.lastname@example.org or call +1 441 297 8686.