👨🎓 Inflation & your investment strategy
**9/52** Macro Mornings Education
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👨🎓 This is part of a 52-week series on macroeconomics designed to build your knowledge step by step. Feel free to catch up on previous emails here if you'd like to start from the beginning!
Dear all,
We’ve discussed how inflation affects your savings; now, let’s explore how it impacts your investment strategy.
Inflation doesn’t just erode the value of money - it also affects different asset classes in various ways.
Understanding these effects can help you adjust your investment strategy to protect and grow your wealth.
Here are a few ways to consider inflation in your investment decisions:
Stocks as a Hedge Against Inflation
Historically, stocks have outpaced inflation over the long term.
Companies can often pass increased costs on to consumers, which helps maintain their profit margins.
For example, if inflation causes the cost of raw materials to rise, a company might increase the prices of its products, preserving its profitability and potentially boosting its stock price.
However, it’s essential to choose companies with strong pricing power and solid fundamentals.
Real Estate Investments
Real estate is another asset class that tends to perform well during inflationary periods.
Property values generally increase with inflation, and if you own rental properties, you can raise rents to keep up with rising costs. , during periods of high inflation in the 1970s, real estate prices in many areas surged, providing a solid return for investors.
Commodities and Precious Metals
Commodities, like oil, agricultural products, and metals, often rise in price during inflationary periods.
Precious metals like gold and silver are traditionally seen as safe havens during inflation.
For example, during the inflationary period of the late 1970s, gold prices skyrocketed as investors sought to preserve their wealth.
Inflation-Protected Bonds
As we mentioned in the last email, Treasury Inflation-Protected Securities (TIPS) and similar instruments can be valuable in an inflationary environment.
These bonds adjust their principal value based on inflation, ensuring that your investment keeps pace with rising prices.
Reduce Exposure to Fixed-Income Securities
Traditional fixed-income investments, like bonds, can lose value during inflation because their fixed interest payments become less valuable in real terms.
However, not all bonds are equally affected. Shorter-term bonds are generally less sensitive to inflation than longer-term bonds.
Let’s consider a practical example: Suppose you have a $100,000 investment portfolio with 60% in stocks, 30% in bonds, and 10% in cash. If inflation is expected to rise, you might shift your allocation to 70% stocks, 20% bonds (with a focus on shorter maturities or inflation-protected bonds), and 10% in assets like real estate or commodities.
This adjustment can help mitigate the impact of inflation on your portfolio.
In our next email, we’ll look at hyperinflation - an extreme form of inflation - and what lessons we can learn from historical examples.
Alessandro
Founder of Macro Mornings
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