Let’s debunk two main myths about how to invest during high inflation, and then suggest an alternative:
Buy gold – Some people believe that the price of gold goes up during periods of high inflation. But that’s not always true; gold doesn’t always maintain its price. In fact, as I write this, gold is down compared to where it was in the recent past even though inflation is running high.
Buy real estate – Some people think that investing in real estate is a good hedge against inflation. While it may be tempting to get a mortgage when rates seem low in order to purchase an investment property, this may be risky.
During periods of high inflation, the Fed gets nervous and raises interest rates in order to fight inflation. Now an adjustable rate mortgage isn’t as attractive. High inflation may lower property values as banks reclaim property, and more properties are put on the market.
Once you lose your property, it’s gone. Compare that to long-term investors in the stock market. If the market drops, the paper value of their portfolio drops. If they hold onto their investments, and wait until the market recovers, they may end up not losing any money… even potentially walking away with a profit.
What should you do?
Consider investing in the stock market as a hedge against inflation. Equities may be a good inflation-fighting strategy since being in the market when inflation is high is “riding the wave” of the money that’s being pumped into the system.
During periods of inflation, there’s more money in the economy. More money going into the economy translates into more money being invested in the stock market. When demand is high, prices rise accordingly, and an investor who is in the market, may profit.
Traditionally, during periods of inflation, companies earn more, since prices rise.
Past performance is never a guarantee of future returns, and the recent volatility has made it difficult to believe in long-term investing. But, it may be appropriate for certain people to invest in the stock market during periods of high inflation. To see if you are one of those people, let’s talk, call 02-624-2788.
Published August 11, 2022.