How to protect your money from inflation and market instability
When the market becomes volatile and the economic outlook looks uncertain, budding investors might be tempted to opt for strategies offering short-term gains, or simply pull out of the market entirely. However, as Alexander Herr (ACSI), partner of Inspired Invest Consultancy, explains, regardless of the economic atmosphere, slow and steady almost always wins the race.
The year 2022 was an exceptionally challenging market environment. Against this unstable backdrop, global financial wealth shrank by 4 percent to 255 trillion US dollars - falling for the first time since the banking crisis in 2008, according to findings of the Boston Consulting Group (BCG). This downturn came after a rise of 10 percent in the year 2021. Talk about volatile times!
High inflation breeds investment unease
This trend was combined with historically high and persistent inflation, which lasts to this day. While German inflation has declined somewhat since the beginning of 2023, the current inflation rate still sits at 6,4 percent as of June 2023.
With geopolitical uncertainties and international recessionary fears remaining, this is not a mix that excites potential investors or coaxes them into entering the market, unless one takes a long-term view. The fact is that many investors are currently on the sidelines awaiting a more stable outlook.
Sitting on your cash only decreases its value
However, simply waiting for better times, leaving your cash untouched, is not a good short-term investment strategy, especially during times of heightened inflation. It inevitably will lead to capital erosion, unless one has an investment vehicle that outperforms the underlying inflation and all other costs.
Markets over the long term have always outperformed inflation and provided a good "real rate of return". However, it is market volatility that has a major impact on overall performance, especially when we analyse shorter year-on-year rolling investment periods of say five to 10 years.
How can we ensure consistent performance amid volatility?
Over the last two decades, we have seen a rising number of major market correction events. This has had a major impact on investor confidence, experienced and inexperienced alike. With this in mind, how many investors would have stayed the course to enjoy the long-term S&P 500 market performance during some of the major market downturns, for example?
Whilst retrospectively the 2008 market correction will be a blip in our rear-view mirror over the long term, if investors find themselves in the midst of a major correction in real-time, will they stay the course or exit early? For us, even if short-term, high-risk investments promise larger returns initially, they will often be overtaken by lower-risk, consistent investments when given enough time.
The table below shows this clearly:
|Investment amount||100.000 EUR||100.000 EUR||100.000 EUR||100.000 EUR||100.000 EUR|
|Year 1 return||15%||20%||-30%||35%||7%|
|Year 2 return||20%||-25%||25%||-10%||7%|
|Year 3 return||-30%||15%||20%||-12%||7%|
|Year 4 return||-7%||-5%||-4%||-6%||7%|
|Year 5 return||25%||20%||20%||30%||7%|
|Final value||112.297 EUR||117.990 EUR||120.960 EUR||130.656 EUR||140.255 EUR|
Great short-term headline performances may seem attractive, but consistent above-average performance with a controlled volatility, based on a diversified portfolio, is more rewarding.
Caution trumps action in times of financial uncertainty
As I said above, even if investors don’t want to invest capital in the market right now, they still need to adopt a clever short-term liquidity management strategy to stave off the erosive effects of inflation in order to achieve their financial goals. Every year of negative “real rate of returns” will make it harder to reach those goals.
There are short-term investment options available between one to two years that provide a secured, above average stable real rate of return that gives investors the option to stay flexible whilst protecting their capital from inflation. Investors should, however, never be blinded by the promise of high fixed or even so-called “guaranteed” returns.
If it sounds too good to be true, it probably is
In the case of investments, the old adage holds true: be cautious about anything that sounds improbably good. There are many “black box” investments being offered with no transparency whatsoever, where it is impossible to judge whether the underlying investment is real or stacks up to deliver the return promised. In this context, 100 percent investment and cost transparency are imperative. If this cannot be provided, investors should take a step back and look for alternatives as they may be being offered a possible scam investment.
If you want to invest short-term, consider this
Let’s circle back for a second: Yes, there are professional, fully transparent, and highly attractive short-term investments available for those investors that do not want to commit to the “long term” at present, but they are always encouraged to do their own due diligence.
As with any investment decision, they should ensure that the underlying investment concept makes sense and stacks up to deliver what is being promised. An investment with proven past performance is always preferable to a newly launched solution.
If you choose to invest, follow these rules
With over 35 years in the international financial services space, I have seen the good, the bad and the ugly face of investment solutions. Irrespective of investors' risk profile, capacity to risk and actual financial objectives, when investing money there are fundamental investment criteria that will significantly increase the likelihood of a satisfactory investment outcome. These are:
- Broad investment diversification using non-correlating assets
- Controlling market volatility
- Consistent investment performance
- Full investment transparency
Indeed, following the first criteria will normally lead to the second and third. Investment volatility is often an overlooked topic. After a drawdown, markets often rebound.
However, we should not forget that investors need to recoup their previous year’s losses first before they can cite a true positive performance on their original investment. It sounds obvious, but this is often ignored when markets recover and deliver positive returns again.
Just remember this. If an investor loses 50 percent of their original capital, the remaining capital left needs to grow by 100 percent just to regain the original investment!
If you would like to learn more about professionally managed short-term income or non-income wealth management solutions with an above-average fixed annual return, please do not hesitate to contact Inspired Invest Consultancy, a specialist in international wealth management and flexible cross-border product solutions.