Inflation – Friend Or Foe?

We may naturally think of inflation of public enemy #2 (well, second to the pandemic probably) – but is there any way to make it work in your favour?

The answer is both yes and no. And the most crucial key lies in what you decide to do about your cash. Think that your money is safe in the bank earning a regular interest? You might want to think again! When the rate of inflation outpacing current interest rates, it simply means that you are losing money by keeping it all in cash.

So the key to winning in the long run, is to start investing as soon as possible. With that being said, investing should be a financial step taken after you already have the basics of insurance protection and emergency funds (at least six months of living expenses; more if you are a sole breadwinner) covered; thereafter you can drive your remaining funds into your portfolio for wealth accumulation purposes. Even if you only begin with a relatively small bit of your money, that’s something.

But now you say, “Isn’t it safer to NOT invest? I would probably lose more money right now with how the market is performing!” The answer is yes, you should not expect to reap any returns in the short term.

However, when you hold productive assets that generate positive cash flow, they can actually outperform the current high levels of inflation. For example, the S&P 500 has gained about 10.7% on average annually since it was introduced in 1957.¹

The thing to know is that even though inflation is high, keep in mind that many asset prices are too.

To shield your portfolio from inflationary pressures, here are some qualities that you should look out for when choosing companies to invest in:

1. Look for businesses with high pricing power and low CAPEX.
2. Look for businesses with increasing free cash flow and low debt.
3. Look for companies that provide essential products and services.

Sources:

¹ https://www.businessinsider.com/personal-finance/average-stock-market-return