We all know inflation as the key component that’s made cars, houses, and groceries more expensive over time. It’s also responsible for a fluctuating value on the money in your wallet or bank account. The question remains, how does rising inflation impact your investments?
“Rising” sounds good. Therefore, rising inflation must be good for investments — right? Let’s unpack this a little bit.
What is inflation?
Essentially, inflation is the consistent upwards movement of the overall price of things in the economy. We all know that the cost of a car or soda was far less during your parents’ or grandparents’ time. This difference in price from then to now is caused by inflation. Inflation may sound like a negative in this scenario. However, inflation can have tremendous impacts, such as buying a home and seeing its value go up.
What does rising inflation mean for investments?
Rising inflation impacts different investments in a variety of ways.
Fixed income investments
Fixed income investments have a lower risk but also a lower reward. They provide a stable income stream with steady growth. However, this growth is often smaller than the growth of inflation, thus decreasing the investment’s purchasing power over time. The low-risk traits of bonds make them a valuable portion of any portfolio. However, these investments’ slow growth and fixed characteristics make them unfavourable when you consider rising inflation.
Stocks tend to perform better over time when we look at inflation. This positive performance is due to the theory that a company’s revenues and earnings should increase proportionately over time to inflation. This continuously rising value makes stocks stronger when paired against inflation. However, they also come with increased volatility and risk.
Real assets tend to perform well against inflation. Unlike bonds, an asset’s value increases over time along with inflation. When done right, real estate investing can provide decreased volatility in comparison to the stock market. When we look at the long-term historical data of real estate prices and value, there’s more diversity within the investment and the added security of a growing real estate market in a mortgage pool.
How to plan for rising inflation
If you factor inflation into your investment plan, you’ll be better prepared and aware of how much you’ll need to save for the future. Affording the lifestyle you have now will cost more in the future. Inflation isn’t a 100% terrible thing, though. It simply means factoring rising inflation into your investment plan.
There’s one thing you can do to protect your investments from rising inflation:
- Diversify your portfolio. We’ve just mentioned the benefits and disadvantages of different investment styles when we look at rising inflation. By diversifying your portfolio, you decrease risks and better prepare yourself for inflation.
Our team at Cooper Pacific is here to help you plan for your best future. Experts manage our mortgage pools to ensure your money is put to work. The benefit of investing in a professionally managed mortgage pool is that there’s a decreased risk and real estate value grows proportionally to rising inflation. This protects you from some of the harmful effects of inflation while providing you with more security thanks to professional management and diversified mortgage investment. To learn more, get in touch with Jordan on our team today.