What is inflation?
Inflation is a broad term used to describe the general rise in the price of goods and services over time. This gradual increase effectively diminishes the purchasing power of your money. To illustrate, consider the consistent rise in petrol prices, which have increased by an average of ~6% annually since the 1970s.
A simple example of inflation is the cost of your standard groceries. What you could buy for say $100 in 2020 would today in 2023 instead cost you $117 due to ~5% per year inflation.
When inflation rates skyrocket, as they did in 2022 to 9% per year in the US and more than 7% in Australia, it becomes imperative to ensure that the growth of your investments surpasses the rate of inflation. That way, you can maintain and potentially grow the value of your assets despite the escalating costs.
What is stagflation?
Stagflation represents a particular economic scenario wherein rapid inflation coincides with stagnant or slow economic growth, coupled with a rise in the unemployment rate. This peculiar combination creates an environment where different types of investments respond differently.
For instance, some sectors of the stock market, like gold and commodities, often demonstrate resilience and potential growth during periods of stagflation. Conversely, high-growth companies that heavily rely on future earnings might find themselves in a tough spot, as the value of these future earnings decreases under the pressure of rampant inflation.
How can l protect my investments from stagflation?
Navigating through a period of stagflation can be a challenging task for investors. In such an environment, traditionally reliable asset classes like property and fixed income investments often struggle to yield substantial returns due to the adverse combination of high inflation and low economic growth. However, not all is gloomy during stagflation.
Certain assets, like gold, have historically proven to be sturdy investment choices during these periods. Acting as a hedge against inflation, gold can provide a buffer for your portfolio when other assets are underperforming.
“When inflation rates skyrocket,, it becomes imperative to ensure that the growth of your investments surpasses the rate of inflation.
How can l protect my investments during high inflation?
When faced with a period of high inflation, having a proactive, adaptable strategy is a must for preserving the value of your investments. Different assets tend to perform well under varying economic conditions. For example, commodities and emerging markets often excel in an inflationary growth scenario, where both inflation and economic growth are on the rise.
On the other hand, during times of low or declining inflation, fixed income investments can benefit if growth is slow, while U.S. and global shares might perform better if growth is robust.
At Stockspot, our guiding principle is simplicity. Rather than advising you to chase a specific stock or company to invest in, we advocate for diversification across different asset classes. This tactic provides a robust line of defence against inflation over the long-term.
It ensures that at least some of your investments will perform well regardless of the overarching economic conditions.
For instance, gold may generate significant returns during stagflation, while global shares might flourish when inflation is low and economic growth is high.
Looking to invest in a high-inflation environment? Stockspot Topaz Inflation is a portfolio of investments that have historically provided higher levels of inflation protection. Learn more about this portfolio here.