Investing to beat inflation, and It’s a must-do
“Running up a down escalator.” That’s what legendary investor, Warren Buffet, had to say about inflation.
And it’s true.
Growing your hard-earned money in a saving account is difficult enough. The interest rates are low. And when you factor in inflation, it’s almost impossible. Did you know that South African inflation sits at around 5.9%? That is right at the top of the South African Reserve Bank’s monetary policy target inflation range of between 3 and 6%.
That means having your money in some of the best paying easy-access accounts and even some fixed deposit savings accounts. You’re actually losing money in real terms.
The culprit? Inflation, where prices go up, and purchasing power goes down.
Investing to beat inflation is a must-do to make sure your nest egg grows faster than the soaring cost of living.
Let’s look at investing to beat inflation
Anyone can invest, even if you start with a few rands. Now, while it’s always best to get help from the experts, you don’t need a financial adviser. It’s a riskier approach, especially if you are a novice investor, so using the services of a financial advisor should be your first port of call.
On the other hand, you can use one of many online investment platforms. In this case, it’s probably best to choose a ready-made fund where you select your preferred level of risk. The platform then offers a selection of funds that suit your risk profile.
1. Diversify your investment.
On diversification, you should build a diverse portfolio, or ready-made diversified fund, with a mix of assets. These could include equities, property, bonds, and alternative investments such as gold, often seen as a safe haven that can maintain value in times of stock market turmoil. This means you won’t be overexposed to the ups and downs of assets, firms, or sectors.
2. Invest in gold.
Gold is the oldest hedge against inflation.
The shiny yellow metal has grown at an average annual gain of 9.48% over the 20 years between September 2001 and September 2021. Over the same period, inflation was much less, which means gold investors are sitting pretty with several percentage points above inflation.
3. Look for companies that can raise prices when inflation rises.
Find that business with a reputation for brilliance. Now compare it with one which has a reputation for bad economics. Which would you choose? Would you still choose the brilliant company if they put their prices up? Chances are, if you’re an intelligent investor, you will.
What this means to you and your battle against inflation is that you can invest in a business that can increase its prices without losing business. You have significant advantage during periods of high inflation because the company can now offset its increasing costs.
4. Invest in yourself.
One of the sure-fire ways of beating inflation? Invest in yourself and your own talent. This is one of the best ways to maintain your purchasing power over time and defeat inflation.
The best lawyer or accountant in town benefits from having paid for their education in “old rands” but can now offer their services in “current rands.” That means they’re ahead of the curve, at least in investing to beat inflation
5. Keep some cash savings
Now, while we haven’t been kind to allow your money to sit in a current or easy-to-access savings account, it’s vital to do so. On that subject, you should ideally have 12 months of average income as “cash in hand”. Yes, interest rates are low compared to inflation, but if you’re faced with an emergency, like losing your job, and don’t have cash, you’re in a dilemma.
This is because ALL your money is now invested in the stock market. What if it’s a downturn? You’ll have to sell, which means losing money, and inflation wins.
The solution: find the highest-paying savings account to protect your money against inflation as much as possible.
6. Limit your wants.
This is a no-brainer. Worried about inflation and your rand simply being unable to go the distance? Cut back on the needless things in life, the stuff that can make you drown in consumer debt: the designer trainers, that overly expensive watch. Now, look at your bank account? You still have as much money as you had, giving you a considerable defence against the vicissitudes of life.
To sum up, whilst we have included practical day-to-day tips (like limiting your wants), we have also made the financial case of investing to beat inflation.
And again, that’s a no-brainer. Investing in a diversified portfolio over a more extended period is almost always several points ahead of inflation, and that’s where you want to be.