Many people think that if they have a lot more money, they don’t need to worry about inflation. However, if you ignore it, you may lose some of your wealth.
Inflation is a silent killer of your wealth and may cause financial troubles if you don’t seriously consider it and plan to avoid it.
When the cost of goods you purchase, such as food, gas, and other necessities, keeps rising over time, this is known as inflation. Everything seems to be becoming more and more costly.
So, how does it impact your wealth?
First, we need to understand what wealth is because many times people think that wealth is simply how much bank balance you have.
But that’s not correct because there is a problem with this perspective.
While banks do give you interest on your cash in a bank account, it is not too much. It’s usually lower than the inflation rate, so it is not real wealth.
Over a period of time, your bank balance decreases in value due to inflation.
For example, in 2024, the US inflation rate is 3.3%. If your investment, whether it is in stocks or just in your bank, does not earn more than 3.3%, you will lose money over time due to inflation.
This shows the impact of inflation on your wealth.
Investing to Beat Inflation
Selecting assets with the potential to generate returns greater than the average global inflation rate is the key to investing to beat inflation.
The following is a list of tactics that will assist you in achieving this:
Diversified Global Investments
- Diversify Portfolio: Invest in a diverse portfolio that spans several nations and industries and includes international equities, bonds, real estate, and other assets.
- Risk Reduction: This helps you take advantage of growth opportunities in different economies while also reducing overall risk.
- Long-term Growth: Over the long term, a globally diversified portfolio has a better chance of outpacing the average global inflation rate.
Stocks and Equities
- Invest in Stocks: Investing in stocks, either directly or through index funds, has historically been one of the best ways to beat inflation.
- Resilient Companies: Stocks of companies that can pass on rising costs to consumers and grow their earnings tend to do well during inflationary periods.
- Historical Performance: The S&P 500 index, for example, has returned an average of 11% annually over the past 20 years, well above the average global inflation rate.
Real Estate
- Hedge Against Inflation: Real estate, whether through direct property investments or REITs, can provide a hedge against inflation.
- Rising Values: As prices rise, rents and property values also tend to increase, helping to maintain purchasing power.
- Higher Costs: However, real estate also carries higher upfront costs and risks compared to other asset classes.
Inflation-Protected Bonds
- TIPS: Bonds like TIPS (Treasury Inflation-Protected Securities) have their principal values adjusted for inflation, providing a real return.
- Diversification Tool: These can be a useful diversification tool in an inflationary environment, though they generally have lower returns than stocks.
Commodities and Gold
- Inflation Performance: Commodities like gold, oil, and agricultural products have historically performed well during periods of high inflation.
- Rising Values: As the prices of goods rise, the value of these underlying commodities also tends to increase.
- Volatility: However, commodity prices can be volatile in the short term.
Diversified Portfolio Strategy
The key is to maintain a well-diversified portfolio that includes a mix of these inflation-hedging assets, rather than relying on any single investment.
This can help ensure your investments keep pace with or exceed the average global inflation rate over the long run
