Even if inflation doesn’t bite as much as a market crash, Global Trading Platform it can still be disastrous for your portfolio in the longer run. This is because inflation diminishes the value of a portfolio year after year.
Inflation, therefore, is a risk that you should know how to manage if you plan to stay in the investing game longer.
What happens when inflation happens?
Inflation can bring about many unfavourable situations for investors. These things include Investing Tips the following:
- Purchasing power – the purchasing power of the people will become weaker and weaker as time goes by.
- Markets – the stock and bond markets will become more and more volatile due to the destruction caused inflation.
- Fixed-income securities – the income coming from fixed-income securities will be valued lower and lower.
- Profit margins – the profit margins of specific kinds of stocks will be squeezed.
Impacts on Portfolio
Experienced investors know that the impacts of inflation on their portfolio can be measured through the longer, overall impact. They can also scrutinize the short-term disruptions on specific asset classes.
Looking at it at the long term perspective, inflation can decrease or erode a portfolio’s power to purchase. For instance, if the average inflation rate yearly is 3 percent, your portfolio’s value can be cut every 23 years, more or less.
Because of this, the longer term impact of inflation on your portfolio is just as terrible as the market crash’s impacts. It may even be considered worse.
History proves that market crashes are almost always followed by periods of bullish recovery, albeit a troublesome one. Inflation, however, is extremely rarely followed by deflation, or negative inflation. In effect, the impacts of inflation tend to become permanent.
This is the reason why you cannot shrug off inflation risks. Compared with other kinds of risks, inflation risks cannot be dodged or avoided by being a conservative investor. Even if you hold on to cash, when inflation bites, its purchasing power will still be decreased.
Protect Yourself Against Inflation
There is no sure way to avoid inflation, but you can try to minimize its impact in a variety of ways.
Different kinds of commodities, like oil, grains, metals, and others, are most usually considered as hedges against inflation. Commodity prices usually climb up during inflation. Therefore, it’s not a far jump to say that rising commodity prices are the sole reason for inflation.
However, you might still suffer some risks if you’re planning to invest in commodities.
First, commodities do not have any inherent value outside of their market. This is because they have no income or earning stream.
Second, commodities are prone to speculation, which is linked with increased volatility. This can be true during periods of high inflation, which means they can be most risky when they’re apparently the most appealing.
Third, there are various kinds of commodities, and not all of them rise during periods of inflation. Also, not all inflation can affect commodities.
It is very necessary for you to pay attention to inflation and the risks associated with it. You should be able to foresee anything that signals the event of inflation if you want to protect your portfolio against its disastrous effects.