How Can Investors Manage Investments In High Inflation?

Thursday, 21 October 2021, 8:50 pm
Press Release: Kalkine

Summary

• The inflation surpassed analysts’ expectations in the September 2021 quarter.
• Investments in equity, bonds and debt-related instruments become extremely volatile during inflationary times, making investors cautious of their investment choices.
• Investors can embrace some key strategies to wade through periods of inflationary spells.

The New Zealand economy is grappling with strong inflationary pressures that came as a by-product of the country’s speedy economic recovery from the pandemic. The CPI data suggests a faster than expected rise in inflation during the pandemic, triggered by the red-hot property sector and global supply chain blockages.

With consumers facing the direct brunt of a drastic inflation hike, individuals might struggle to achieve enticing returns from their investments in the coming months. However, with proper planning and prioritisation of needs, investors can mitigate or, at the very minimum, lessen the impacts of inflation on their investments.

Economic growth backed by unprecedented government spending is often a gateway to rising price levels in a nation. While inflationary pressures had been anticipated by NZ experts since the beginning of the pandemic, the magnitude of the price rise has been surpassing their expectations.

The latest data by Stats NZ reveals that the country’s consumer price index (CPI) rose by 2.2% in the quarter ending September 2021, marking the most significant increase in over a decade. The CPI hike largely stemmed from housing-related costs, like the local authority rate and construction of new houses.

These inflation numbers have emerged as a fresh cause of concern for investors, who usually consider investing during inflationary spells a precarious venture. Investments in equity, bonds and debt-related instruments become highly volatile in an inflationary period, which leaves a widespread economic impact. Moreover, rising inflation is believed to corrode the value of returns offered on fixed-income instruments.

In this backdrop, let us discuss three crucial tips that can help investors avoid holding any risky investments during inflationary periods:

Ensure an early arrival in the investment arena

Investing early and consistently maintaining the investment are two essential practices that go behind the formation of a sound investment fund that can be used in a crisis. These practices allow an investor to develop a robust financial guard against inflation.

It goes without saying that the earlier an investment fund starts, the more significant value it can accumulate over the years. Time adds to an existing investment by providing risk-adjusted returns. Essentially, this means that any market movement would be reflected in the value of the long-term funds kept by an investor.

However, early arrival on the investment playfield is not enough. Investors should also ensure that their funds are well managed and put into high-return investments. In a way, consistency and active monitoring of funds are required to reap the maximum reward of investing.

Conduct dynamic portfolio restructuring

While inflation makes traditional investing instruments risky, it does not render all market investments worthless. There are a few market instruments that tend to perform better under short-run inflation. Investments in equities can deliver huge returns during short-run inflation as companies tend to earn massive revenue amid high prices of commodities.

However, the same is not true for all companies. Thus, investors should carefully restructure their stock market investments and invest more heavily in companies that can generate higher revenue during inflation without any substantial increase in their costs.

On the contrary, investors can refrain from investing in traditional bonds and fixed-income assets as their returns do not adjust for inflation. Rising prices eat away the value of returns from fixed-income instruments, making investors worse off.

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Look beyond traditional investments

While it may seem tempting to invest in stock markets, it is essential to remember that some investments exist outside the conventional market setup. One such example is commodities, primarily gold, which is considered as the best hedge against inflation.

A more unconventional approach to hedge against inflation is to invest in oneself. Individuals can avoid landing in a risky investment by utilising the funds on themselves. This entails re-branding themselves by obtaining additional education on a relevant subject that does lose its value over time.

Finally, as the saying goes, a penny saved is a penny earned. Thus, the best way to tackle inflation is to avoid unnecessary expenditure and stick to a predetermined budget. Ensuring that one does not overspend in inflationary times is vital to escape any financial distress.

All in all, inflation can be a risky scenario for investors. However, it is always helpful to invest in those instruments that move in tandem with market movements. Remember, not all assets can be expected to perform well during inflation, so be mindful of where you put your hard-earned money.

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