In the world of investing, there are many different obstacles to navigate. Right now, it seems like inflation is the biggest concern for investors hoping to prosper in the market.
Let’s take a look at the current investing climate and steps you can take to protect against rising prices.
Why do investors see inflation as a threat?
Rising prices due to inflation have the power to eat away at your investment returns.
This is because the buying power of your money will be reduced. So if the return on your investments was 6% but the level of inflation was 3%, your real return would effectively be 3%.
There is also the self-fulfilling prophecy that investments sometimes have lower returns during inflationary periods. This is simply because people are less excited about pumping money into the market, which can lead to slower growth.
How many investors are concerned about inflation?
According to a recent survey by eToro, 36% of UK retail investors share concern over rising prices.
Globally, the figure is slightly higher, with 38% of investors seeing inflation as a worry. Even more respondents in the US are troubled, with 51% of investors highlighting inflation as an important issue.
Interestingly, there is a divide among men and women. Only 34% of female investors see inflation as a threat compared to 42% of men.
What can people do to combat the effects of rising prices?
In order to try and protect against inflation, some investors have been turning to gold. However, there are other ways to try to hedge against this natural ebb and flow of the economy.
Some traditional hedges include things such as real estate and commodities. There are others as well – take a look at our article on sectors that tend to perform well during inflationary periods.
Certain cryptocurrencies like Bitcoin were designed to be a useful asset during times of inflation, but that hasn’t been the case recently.
The content in this article is provided for information purposes only. It is not intended to be, neither does is constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Should inflation change the way I invest?
One way to try to beat inflation is through diversification. In order to diversify, you need to have a share dealing account that gives you access to a broad range of assets.
If your portfolio focuses too much on just one type of asset – such as stocks, bonds or cash – you might be leaving yourself exposed.
Ben Laidler, global markets strategist at eToro sums up the current situation nicely: “The global economy is in a strange state at the moment. For perhaps the first time in history, central banks around the world are happy to let inflation run hot for a short period in order to let their economies recover from the pandemic.
In his opinion, “that provides an incentive for investors to keep putting their money into equities, which have proven to be the only long-term asset able to consistently deliver inflation-beating returns.”
As always, it’s important to remember that the markets are susceptible to short-term fluctuations. A long-term investing strategy and a diversified portfolio could potentially help you ride out short-term changes in inflation.
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