Inflation is rising around the world. Driven by globalization, low-interest rates and technological advances, households have enjoyed years of accommodating financial conditions. But driven by pandemic-era economic stimulus and geopolitical conflicts, prices are back on the rise due to steep consumer demand and reduced supply. And far from a transitory inflation shock, it seems like a level of inflation could be here to stay for a couple of years.
With semiconductor shortages that could be set to last until 2024 and energy and food prices that, according to the World Bank, could remain higher for years to come, it seems as though we may need to prepare to live with higher prices for the long term. In developing economies such as Latin America (where inflation is already at a 15-year peak), these pressures are having a damaging effect on lower-income households.
As savings and fixed-income assets are eroded by spiking prices, it could be easy to decide that inflation is devastating for investors – but is this really the case?
Inflation does not impact all assets and investment classes equally. Rising interest rates and general prices can be detrimental to personal savings and fixed-rate debt securities, but inflation can have a beneficial impact on others. Real assets, such as gold, have long been favoured amongst experienced investors for their ability to mitigate the worst of an inflation surge.
Real estate is another real asset haven for investors seeking to store value. As material costs rise, the construction costs of new homes can be expected to increase as well. These costs are usually passed on to buyers and renters in the form of increased rents, resulting in improved returns for property investors.
Those with a diversified portfolio, covering certain real assets, may well have mitigated the sharpest increase in prices. As with these kinds of investments, a rise in inflation also leads to a rise in the value of the underlying assets.
A diversified portfolio is a key to potentially covering the costs, or even profiting, from inflation. Although it is important to note that diversification does not guarantee returns or offer absolute protection against potential losses. So how best can investors look to turn inflation into an opportunity?
Depending on your financial ambitions, investors may want to choose more active or passive investments. Active investments require investors to take a more hands-on approach, usually through a portfolio manager, with the aim of securing better returns than stock market averages.
Under this approach, portfolio managers will undertake a much more extensive analysis before deciding what and when to invest and when not to. Although active investing can be a little riskier, this strategy gives a wider range of investments to choose from, such as bonds, stocks, mutual funds and even shorts.
Passive investing is less about outperforming indexes and more about making secure investments. As passive investors are just looking to match what the rest of the market is doing, it’s more of a hands-off approach, meaning it’s a safer option for people who are investing their retirement savings or are more concerned with reaching financial goals instead of accumulating sizable profits.
Common passive investments can often be dividend stocks or shares of index funds or ETFs. These will typically look to track certain indexes, making passive investments that appreciate during times of inflation a great way to store value.
How investors balance their active and passive investing depends on what they are looking to achieve, but creating a diversified portfolio that creates value in a time of inflation certainly requires an understanding of both.
Historically, passive investing generates steady income, making it a more favourable strategy for those wanting to reach their financial goals. So for investors looking to generate longer-term streams, real estate is one of the best areas to invest in.
As touched on above, real estate values rise at the same time as inflation, making it one of the best ways to profit from the increase. Plus, in economies where there is a shortage of affordable housing (such as the US), demand for rental properties is skyrocketing, leading to increases in rental prices. So not only can the right real estate be a good way to store value, it can turn a profit too.
Real estate also offers good long-term prospects for both investors. As demand for properties outstrips supply, tenants are quick to secure longer contracts, giving investors a reliable source of passive income that increases with inflation.
As inflation rises, investors with decreasing fixed-income yields may look to pull their investments entirely, on the belief that inflation is a counterweight to profits. However, as certain assets struggle, others benefit. By investing in the right high-yield assets such as real estate, investors can cover much of the cost of inflation. By not investing at all, inflation will continue to eat at people’s purchasing power. As a passive generator of income, real estate is an important part of any diversified investment portfolio.
At Bricksave, we give people the opportunity to invest in global real estate from as little as $1000. Bricksave properties are purchased outright, removing the risk of debt from your investment. It only takes a few minutes to invest in a property and to start generating important passive income that can help cover the costs of inflation. Find out more about investing with Bricksave here.
May 24, 2022
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