Thursday, 21 June 2012

How I prepare myself for living with high inflation

The upcoming inflation is written on the wall. Nobody knows when consumer prices will begin to go up across the board, but it might be a matter of months.

Investing in times of inflation requires a shift in our mental patterns, since prices no longer serve as reference of value. If you have lived during the last decade in a country with 3% annual inflation, are you ready to cope with 10% price increases per year? What would you do if currency depreciation accelerates to 15% or even 20%? Here are some ideas:

1.- REDUCE YOUR CASH AND BOND HOLDINGS. When prices rise at a high speed, fixed-rate debt loses value equally fast. If you buy a treasury bond at 2% and interest rates go up to 4%, you will incur a substantial loss when you sell your bond. Cash is the worst possible holding during inflationary periods, since it loses purchasing power by the day. You will do better if you buy assets or products as soon as you receive money, since those items will be worth more tomorrow.

2.- SPREAD YOUR INVESTMENTS INTERNATIONALLY. Do not trap yourself into artificial restrictions. Nowadays, in most countries, citizens are allowed to invest their savings internationally. If you have doubts about the applicable rules, check with your lawyer or investment advisor. Even in the case of global inflation, currencies and assets do not depreciate at the same rate. You will be much better off if you diversify your risks amongst different territories.

3.- FOCUS ON SHARES OF GOOD COMPANIES. Traditionally, real estate is the investment of choice in periods of sharp currency depreciation. That is perfectly fine if you can cope with a situation of lack of liquidity, since in some areas, it takes several months to sell a house. Shares of good companies, spread in different geographical markets, offer the multiple advantages of liquidity, dividends, and risk diversification.

4.- COLLECT DIVIDENDS IN A STRONG CURRENCY. If you live in a country that is likely to experience high inflation during the next years, it might be a good idea to invest your savings in foreign shares that pay dividends in a hard currency. The Swiss Frank has maintained its purchasing power for years much better than other currencies, but it is not the only choice. Ask your investment advisor about the relative strength of different currencies and make an informed decision.

Do not build your future on the moving sand of inflation. There are plenty of choices available to ensure that the value of your savings will be maintained. Rapidly rising prices have many disadvantages, but they also represent opportunity. Instability brings about change. It is up to you to take the necessary measures so that change affects your investments in the right direction.


[Image by tvol under Creative Commons Attribution License. See the license terms under]