The loss of purchasing power will possibly take place in a few months, maybe in a year. If you do nothing, it is going to catch you unprepared.
On the other hand, if you take sensible measures, you should be able to profit from the situation or, at the very least, minimize negative consequences on your life.
The theory behind inflation can be summarized in one sentence: If the amount of items and services produced in a country remains stable, while the number of banknotes increases, then the purchasing power of each banknote will become smaller.
As private individuals, we have to contemplate inflation as a problem to be dealt with. Complaining is unlikely to change anything, at least in the short term, so let us review what paths are open to us in order to escape the loss of purchasing power:
- FOR YOUR INCOME: If possible, try to link your revenue to products or services whose price is likely to augment at the same or higher pace than inflation.
- FOR YOUR CONSUMPTION: Anticipate your purchases of durable goods (such as a television set) and consumer goods that you can store at home (such as canned food) in order to benefit from current low prices.
- FOR YOUR SAVINGS: Reduce to the minimum the amount of cash you keep and invest the rest in assets whose value is likely to increase faster than consumer prices.
For this reason, in order to avoid investing your savings in one single currency, it makes good sense to buy shares of solid companies located overseas. The same risk-reduction strategy applies if you invest in shares of local companies that possess foreign subsidiaries.
Here are two examples that I am currently researching, today May 9th, 2009.
1.- HELLENIC TELECOM (NYSE:OTE). Did you know that despite a worldwide economic recession, the Greek economy is still expected to grow this year? By international standards, Hellenic Telecom is a small phone company, since it has only about 1 million customers, but it yields good profits.
In the current market, the price/earnings ratio of its shares is 8. Analysts are predicting a dividend around 5%.
2.- JOHNSON AND JOHNSON (NYSE: JNJ). This is a truly global company in the field of health-care products. The fact that Johnson and Johnson's profits are generated in different countries and currencies, makes this company a sensible bet against inflation.
Another positive aspect of Johnson and Johnson is that, even when facing a difficult economy, people are unlikely to reduce their consumption of pharmaceutical products. These days, the price/earnings ratio of the shares is about 12. Analysts are predicting a dividend in the range of 3.5%.
Whatever investment choice you make, check everything three times before making any commitment. Investing in shares, even of solid companies, involves substantial risk.
Precious metals and mining stocks constitute alternatives that you might wish to explore, but make sure to gather sufficient information before making a decision.
In any case, if inflation comes, keeping your savings in cash guarantees that you will experience a loss of purchasing power. As it often happens in life, doing nothing tends to be the worst possible option.
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