Investing when inflation is high

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Inflation is skyrocketing all over the world, due to a number of reasons. Until a few months ago, some analysts defined this spike as “transitionary”.

It turned out to be much more permanent than expected. To be frank, at the same time when the word ‘transitory’ was trending in the media, there were other analysts seeing the same inflation movements as long lasting. They turned out to be spot on with their prediction.

According to the US Bureau of Labour Statistics, the March 2022 data for inflation shows the All Items’ index at 8.8 per cent.

Energy alone is at 32 per cent! These numbers are certainly made worse by the conflict in Ukraine, but as I always remind my readers, I am here to talk about business, not politics.

Therefore, here is the topic for today: “How can I protect my money from inflation?”.

This question was actually asked to me last Wednesday at a birthday party dinner. I met Suresh, a top manager in a manufacturing plant.

He was particularly concerned about his cash losing value just sitting in his bank account. Someone at the birthday party told him that I had some experience in cryptocurrency, so he approached me first asking if that was a good idea to mitigate devaluation due to inflation.

I warned him that cryptocurrency is a highly speculative field, and one must be ready to face severe losses before jumping into it. Of course there is the opportunity to generate a significant profit too, but it is imperative that one does not invest into cryptocurrency the money that are in need. Paraphrasing renowned investor Peter Lynch: “If you are investing the money that you need to pay rent or school fees, you are a bad investor.”

Then the conversation with Suresh went on with more practical strategies. For example, I told him that this is the best time to invest on self-improvement.

The reasoning is quite straight forward. With inflation rising, interest rates will be artificially increased, making Government bonds more appealing, and potentially diverting money away from the stock markets.

With stock markets losing value, investing in listed businesses becomes less appealing. Investing in private businesses could be a way to redirect cash, but generally those investments require a relatively high entry ticket.

So overall, during inflationary spikes, money tend to move from speculative positions to safer options. How can a small investor mitigate risk, yet benefit from a period of high inflation? Take courses and invest on him or her self.

If you think it through, you realise that when inflation is low, and the stock market is galloping, then subtracting money from an investment portfolio with the goal in mind of signing up for a training programme, seems to be counter intuitive. Why would someone give up an earning opportunity when the market is healthy.

On the other hand, in time of uncertainty, after taking money away from risky investments, the safest option is to invest on your future.

Suresh understood my points and he was immediately excited at the idea. He told me that for the past decade or so he had been planning to learn software programming. “Perfect timing!” He said at a point. In fact, I believe that this is the right time to pick up new skills.

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