Anti-inflation investing: How to protect your portfolio from loss of purchasing power

Inflation is a concern for many investors, as it can erode the purchasing power of their money over time. However, there are several investment strategies that can help protect your portfolio from inflation. In this article, we’ll explore anti-inflation investing, especially ETFs, as a potential way to protect your portfolio.

What is inflation and why is it an investment risk?

Inflation is the general and sustained increase in the prices of goods and services in an economy over time. When inflation is high, the purchasing power of money decreases, as your money can buy fewer goods and services than it could before the price increase. This may adversely affect the value of your investment portfolio as the real return on your investments may decrease.

The historical pattern of inflation:

Inflation is a phenomenon that has occurred in many economies throughout history. Historical data shows that inflation can vary widely in terms of breadth and duration. For example, in the 1970s, many industrialized countries experienced high inflation, with rates reaching 10-20% annually. However, in the 1980s and 1990s, inflation declined significantly in many countries, thanks to tighter monetary and fiscal policies and increased global competition.

Furthermore, historical data shows that inflation can be influenced by various factors. Such as the supply and demand for goods and services, changes in monetary and fiscal policy, demographic factors, commodity prices and economic events and global politicians. For example, the increase in oil prices in the 70s was the cause of the increase in production costs of companies and influenced the global inflation. While as in the last two years the high demand for goods and services can push prices up.

Anti-inflation investing: ETFs as a solution

ETFs (Exchange Traded Funds) are exchange traded funds that offer diversification and flexibility to investors. Anti-inflation ETFs are designed to protect investments from inflation by providing exposure to assets that tend to perform well during times of inflation. Here are some of the anti-inflation ETFs you might consider:

  • Inflation-linked bonds: These ETFs invest in inflation-linked bonds, which are linked to the performance of the consumer price index (CPI). This type of bond offers protection against rising consumer prices and can be an anti-inflation investment option.
  • Stocks of Defensive Sectors: Some ETFs invest in stocks of sectors that tend to perform well during times of inflation. For example, the consumer staples, pharmaceutical or energy sector might be viewed as defensive during inflation. This is due to the fact that companies in these sectors might be able to raise the prices of their products or services to compensate for the cost increase.
  • Commodities: ETFs that invest in commodities, such as oil, gold, silver and agriculture, may offer inflation protection, as the value of these commodities may increase during periods of inflation.
  • Real Estate: ETFs that invest in shares of real estate companies or physical real estate could be considered as an anti-inflation investment option, as the value of real estate could increase during inflation.

Obviously the advice is to adopt an anti-inflation investing strategy when there is no inflation. The idea is to shield our returns when inflation rises. So it’s useless to invest in it when inflation has grown. In fact, they could be at their peak and give us a beating once inflation subsides.
Because central banks will do anything to appease inflation. Trust me.

I suggest you this post to understand how the economy changes over time.

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