When first entering the world of finance and investment, there is so much jargon to get your head around. It can really be quite ‘taxing’ (pardon the pun!) on the brain! But as always, I like to keep things nice and simple so the average Joe can understand what I’m talking about. There is also a great team at Betterment who can help you with this matter, but here are some basic takeaways of inflation, and what you can do to protect yourself against it as much as possible.
What is Inflation?
Inflation is basically when prices rise and you start to get less bang for your buck. So, let’s say the Americano you order every morning was costing you $1.50 in 2015 and it’s now costing you $2 in 2020. Now in this particular example, it could be because there was a problem with the supply of coffee beans, maybe as a result of crop failure for instance. This would cause the price to inflate as there is less availability of the raw product. The guy selling the coffee then has to pay more for his beans but he still has to make ends meet right? So, he has no choice other than to raise his prices – that’s inflation baby!
But as we know, it’s never as cut and dried as that as there are different kinds of inflation but remember, this is supposed to be an-easy-to-understand read! So, I’m here to help you get to grips with just the basics of the 3 main causes so you don’t end up zoning-out and clicking back over to Insta or FB!
The example above with the guy selling the coffee is what’s known as “cost-push inflation”. There was a problem with the supply of the raw materials therefore the cost was pushed upwards as demand remained the same.
This is where demand overtakes supply. So for example, during Covid lockdown times, everyone started buying laptops to work from home, and stocks were depleted. So sellers decide to hike their prices as laptops, for example, had now become much more valuable.
This would be seen when workers start to expect and demand higher wages because the price of goods and services have risen. Like all of us, they need to survive these rises so they need to be paid more.
Is Inflation Always a Bad Thing?
Actually, no it isn’t. Well, not if you have money invested in a tangible asset like real estate, for example. If you own a house and inflation increases, the value of your home will go up so you could either sell it and enjoy a year traveling around the world, or squirrel away the profit and wait for the next downturn before you reinvest, or you could reinvest it in a bigger and better property.
But enough of the really simple stuff, let’s get your brains cranked up a gear and talk about how you can make yourself as inflation-proof as possible.
So How Do I Make My Investments Inflation-Proof?
Apart from investing in your own piece of real estate, what else is a safe bet? Below is a list of different investment ideas that could keep your money pretty much inflation-proof, but to get some real sound advice surrounding this subject, maybe have a chat with Betterment or Vanguard – I found them both really helpful in navigating me through the options:
- Commodities – these are physical items that have continuous demand in everyday life. Think oil, metals like copper, food staples (grains, sugar, etc), gas, tea, and our much-needed coffee! Obviously, you don’t want to buy a ton of sugar and store it in your pantry, so you invest in it via a commodity fund.
- TIPS (Treasury Inflation-Protected Securities) – these are bonds that have been designed to protect against inflation. Their value adjusts directly according to inflation. But don’t expect to make mega-bucks on these as they pay very low interest rates because they have inflation protection built-in which means they are a safe bet.
- Gold & Precious Metals – As these are real, tangible assets they tend to hold their real value, more or less. Whilst this may not necessarily be the best inflation-proof investment, if you are diversifying where you dish your dosh, this could make up part of your portfolio.
- REITs (Real Estate Investment Trusts) – these are one of the best ways to invest in real estate. They are income-producing real estate funds that pay high dividend yields to their investors. Worth looking into, especially if you are happy to reinvest your dividend payouts.
- S&P 500 – This is an index of the 500 largest public companies in the US. If you are looking for a longer-term investment, stocks can offer good upward potential.
So there it is kids, in a nutshell – a few little tips to help you along the way. As always, please remember that no investment return is completely guaranteed and will always have some element of risk involved, but the ones listed above are a lot safer than most. So have fun, keep your money safe and yourselves even safer!