How to protect your wealth against inflation

The prospect of your wealth decreasing in value due to inflation is one that concerns people - and rightly so. It’s a question that Horizon65 often receives from clients when discussing their retirement investment strategies. Here’s their take on some good strategies for protecting your wealth against inflation

It’s right that inflation can make your wealth decrease in value, but inflation is also an opportunity to build wealth. To explain this properly, it’s important that we understand the big differences between financial wealth and property wealth.

Financial wealth versus property wealth

The main problem caused by inflation is that money loses value in practical terms: for instance, the amount you need to spend to buy a can of cola increases over time. To defend yourself against this, it’s key to hold your capital in a way that backs it with some tangible property. But what does this mean? 

Many investments are not tangible assets but instead are a sort of agreement where, given the amount you put in, you can expect a certain amount of interest. You have a set amount of money, and if you get interest, it will again be a purely monetary amount. Savings accounts, bonds and cash are good examples of this. If the value of the money falls, it falls. We call this financial wealth. 

However, you can also have agreements that represent real ownership, such as stocks (ownership of a company), or real estate, or even a can of coke (as per the previous example). You can use your money to buy real ownership, such as part of a company or a house, and get your profits out of the generated income (cashflow) or the appreciating value. You can always sell the real ownership for money. We call this property wealth. 

The benefit of property wealth is that its growth is effectively “decoupled” from the buying power of your currency. To protect yourself against inflation, you should focus on these kinds of investments. 

What are property wealth investments?

So, what should you be investing in? Let’s take a look at some of the most common examples of property wealth investments:

Real estate

The truly most tangible of all assets is real estate. All humans need space to live and work, but the supply is limited. If you have a property, you have a means of creating income. The first way is to simply hold it and wait for the price to rise, with the intention of selling it later. Property prices were already rising before the inflation rate took off, and it would be very surprising if this trend did not continue. 

The alternative is to become a landlord and to rent your real estate to tenants, in order to create rental income. While this promises the possibility of continuous and long lasting income, it also requires a certain amount of work from you. Finding new renters, occasional renovations and managing the building and the accounting can be time consuming, while using the services of a designated property managing firm could detract from your rental income. 

Stocks

The other major category of property assets are stocks. As ownership certificates of a company, stocks are tangible property that can hedge against inflation. Since there is a huge variety of companies across the world, there is also a huge variety of stocks out there. The diversification inside the asset class is huge, and the availability of different ETFs (exchange traded funds - basically packages of stocks or shares) makes it even easier. 

However, a word of warning: not all ETFs invest in stocks. Some use bonds, or even cash, and so are not suitable to help protect your money against inflation. Even picking the right stocks is not always easy, especially if you are new to investing. 

False friends

A final word on a few “false friends” to be careful around. There are a few assets that are often advertised as protection against inflation. Foreign currencies, Gold, Bitcoin, and different collectibles all fall into this category. 

While being property, they are all or mostly speculative in nature. When you do not have a willing buyer, you cannot make a profit. And sadly, they do not always correlate with inflation, but are affected by other influences. Often it is simply safer to use assets that produce a steady income, like stocks or real estate.

Gold prices, for example, have not meaningfully reacted to inflation rates for the last 20 years, but they have reacted to present and ongoing economic crises. Buying gold now (during a crisis) when demand is high and sellers are relatively few is loss-making, especially if you intend to hold it until the crisis has passed and demand for gold goes down and sellers like you increase. Remember that the adage is buy low, sell high and not buy high and sell low.

Horizon65 works to help you find a private pension plan that you are completely comfortable with. Specially for IamExpat readers, they are offering a free consultation to help you learn how to protect your wealth against inflation in the long-term.