With much of the news lately about inflation. And how inflation has hit a high of 6.4%, I must admit that it can be an alarming sign of things ahead. But should value investing Philippines, worry about inflation that much? I don’t think so. But you also shouldn’t be so calm as to ignore it.
What is inflation?
Inflation is the enemy of cash. Your cash diminish power in direct proportion of the amount of inflation. Inflation hit 6.4%? Your cash is now 6.4% less valueable. Its just the nature of things. And we shouldn’t be quick to blame the government or anyone for that matter. Inflation has good and bad benefits. And learning to take advantage of the good and minimize the bad, is the hallmark of a rational investor. Unless we are walking in the same path as Venezuela, where the top officials are actually druglords that messed up their government with inflation of 2,000,000%, we shouldn’t point fingers yet.
So having known inflation, what else can we do to protect ourselves from it? These are:
#1 – Real Estate
I think real estate is a common sense approach. Most people get the idea of real estate going up in value overtime. That is actually true. Real estate is a good inflation hedge as its returns over time is just above inflation. People with long term holdings of real estate became wealthy. And people who rents it out, can experience an increase in income because rent also increase with inflation.
If you want to be protected with inflation, consider real estate. But keep in mind that real estate is illiquid and you may not be able to turn it into cash immediately in times of need. But you could enjoy the benefits of leverage with it as most banks accepts real estate as loan collateral.
#2 – Stocks
Stocks offer the best inflation hedge. Meaning, if you want to protect your wealth and grow it at the same time, stocks would provide you with the best wealth growing engine available. But it comes with a price. Not all stocks are created equal and not all of them are good inflation hedges. Think of it, stocks are just businesses, and not all businesses are equipped to stand inflation. Take for example an electricity distribution business, even if the cost of electricity generation goes up, electricity distribution can pass the cost to its consumers and the consumers have no choice but to pay up. Its a good inflation hedge. A company like MERALCO can do that.
For the beginner investor, an index fund will usually suffice. A mutual fund index fund like Philequity PSE Index Fund (available on BPI) would take care of the picking of stocks that can withstand inflation. FMETF is also a good example of a good index fund. FMETF is the stock symbol of First Metro’s ETF Index fund.
If you have a down stock market in one country, perhaps you could try investing in other countries like the USA where the opportunities are plenty.
#3 – Currencies
When inflation is high in one currency like our Philippine peso, some other currency may be getting stronger. One example of that is the exchange rate of US Dollar to our Philippine Peso. A year or two ago, the exchange rate of the 2 currencies are 45 pesos per 1 US dollar. Today, because of inflation and some other factors, its 53.7 to 1 US dollar. That is 19.33% in 2 years or 9.6% in a year. Much much greater than inflation. If you exchanged your Peso to US dollar a year or two ago, your money actually gained than lost value because US dollar became more valuable than Peso.
You can learn more about how to trade forex in the Philippines on that website. That website is a great resource for beginners as there is a very easy tutorial there.
#4 – Gold
Since the dawn of time, gold has been the currency of choice of man. If the world exploded and started anew, we might still see gold as a currency around the world even if the bank notes have been destroyed. Man’s fascination with gold has been around us since the dawn of history. So in every hard times, people flock to gold to protect their wealth. Gold is a good inflation hedge and any investor could notice the correlation (or inverse correlation) of gold and the US dollar. If the US dollar goes down, gold went up. You can definitely find opportunities on gold on certain times.
How can you buy gold? There are different ways. Most forex brokers have this option like you’re buying shares of stock.
#5 – Commodities
When inflation goes up, we think that money goes down in value. But actually its reverse. Money does not really go down in value, its just that, the price of everything goes up! Its a different kind of thinking. Meaning, if the price of everything goes up, why don’t you protect yourself by investing in the very thing that goes up itself? Commodities.
Commodities is the name of the investment that are actually the basic materials, foods and ingredients that we use for businesses or consumption. Rice went up? Well, rice is a commodity. If you bought rice before and sell it now, you just protected yourself from inflation plus more. Oil, fuel went up? Well, its a commodity.
Steel, silver, copper, soy beans etc. Everything is a commodity. If everything went up, stock piling commodities that you are knowledgeable about will provide protection and profit for the savvy investor.
If you want to invest in commodities, its the same with the forex brokers.
Conclusion
So there you have it. You have now 5 basic ways to protect yourself from inflation. Being familiar and experienced with them will provide you the savvy value investor a good way to survive, even thrive, hard economic times.
You might ask, if inflation is good for businesses and therefore stocks, why is the stock market down on the announcement of the high inflation rate? Well, the first reason for that is most of them foreign money is at lost when inflation hits, since the currency exchange rates will take a chunk of their profits.
The second reason is what will happen next. High inflation rate invites higher interest rates. Interest rates is the one most investors fear. And we will talk about it on future posts.