How does inflation affect the return?
There are various issues that influence the return on your investments. One of the factors that affect your return is inflation. In this article you will read what inflation means exactly, what the influence of inflation is on your investment return and how you can protect your return against inflation.
What is inflation?
If there is high inflation, the price level in a particular country increases. This means that the general prices in that country become slightly higher, for example in the supermarket or in a restaurant. With high inflation you can buy less for the same amount of money, for example 20 pounds. Inflation decreases the purchasing power of money. Because your money is worth less, you can buy less.
Inflation and the return on your investments
Inflation can rise or fall. If inflation is high, you will not only notice this with your purchasing power. You can also see this reflected in the return on your investments. If there is high inflation, your money is generally worth less. You can buy less with the same money.
If money is worth less, your capital is also worth less. The return you have achieved with your investments is therefore less valuable in practice than in theory. You may have 1000 pounds return, but you can do less with this than you could if there been low inflation. In short, high inflation creates a depreciation of money and therefore a lower return on investment.
Protection against rising inflation
It is wise to protect your investment return against rising inflation. By protecting your return against inflation, you ensure that no money is lost due to an overall rise in the price level.
There are various investment products that protect your return against high inflation. These products are briefly described below. If you want to protect your return against inflation, then invest in one or more investment products below.
Raw materials such as metals, oil and agricultural goods offer good protection against inflation. The only disadvantage of investing in commodities is that many commodities are difficult to evaluate.
If you have a bit more budget for your investments, you can also choose to invest in real estate. However, it is important in this case to calculate the higher inflation in your selling price or monthly rental price. If inflation is higher, you have to ask for more money for your property. If you do not do this, then real estate is not a good protection against high inflation.
Finally, you can also choose to invest your assets in inflation-linked bonds. These funds provide direct protection against high inflation, unlike other investment products. The issuer of this debt paper guarantees 100 percent protection at higher inflation, which makes this investment product the best protector against currency devaluation.
What happens in case of low inflation?
The Bank of England aims for an inflation rate of two percent on an annual basis. However, inflation may be lower than this percentage. Low inflation also has consequences for your investments. Low inflation leads to lower interest rates. These lower interest rates mean that people are more likely to invest. After all, they are not satisfied with the return on bonds and savings accounts.
When people make more investments, the demand for securities increases. If supply stays the same, the prices will rise. Low inflation therefore often leads to rising stock prices. When this is the case, it is therefore wise to buy stocks.
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