Tuesday, 17 April 2012

Doing nothing is usually the worst option

Whether you like it or not, inflation is coming. Economic analysts agree that the newly-printed banknotes are bound to increase consumer prices, although nobody can tell precisely when this will happen.

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 PURCHASES: 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 increase faster than consumer prices.
What will be the exact rate of inflation in each country? At present, we can only speculate about that point, since there are so many factors involved. Price increases tend to spread around the globe, but History shows that the loss of purchasing power varies from country to country.

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.

Whatever investment choice you make, check everything twice 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 consider, 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.

[Text: http://johnvespasian.blogspot.com]

[Image by o palsson under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]