How to Ensure You Don’t Lose Money Part 3

money

In today’s market (April 2013) we’ve got a major problem with most of the investments out there, something most people aren’t accounting for in their calculations, but they should, inflation.  Lots of people will sit in a cash position because they are uncertain where to invest, what the market will do, etc.  What does this really mean?  They are losing 2-3%/yr.

If you don’t want to lose money you have to beat inflation.

Most people, most of the time don’t need to contend with hyper-inflation and frankly, hyperinflation is a tough thing to cope with so we won’t address that here except to say that real assets provided you can hold them are the only real hedge there.  But we all deal with the threats of inflation, which is historically in most of the western world somewhere around 3% give or take.  For those who aren’t familiar inflation is the gradual decrease in purchasing power of each of your dollars due to increases in prices.

Today, bonds, GICs, and savings accounts actually provide a negative return when measured against inflation (banks are advertising 2%/yr. as though it is something special).  In other words you’re losing money (albeit not a lot) even as your money sits in a savings account.  To be clear, you still have the same number of dollars you just can’t buy as much with them, which in the short term doesn’t seem very substantial but it compounds and adds up with time.

So, what are your options?  If you can get a fixed income investment such as a bond, or a debenture, or a loan on a mortgage, which when adjusted for real risk pays more than the value of inflation you’re fine.  Probably the most obvious example of how you can do this is with whole life insurance, which will typically beat inflation and has an array of other benefits, not to mention being about as close to risk free as you can get.  But what about if you can’t easily get cashflow greater than inflation, particularly when you account for risk?

Some investments are essentially inflation adjusting.

There are some investments that are essentially inflation adjusting, this is an advantage of equities and potentially commodities.  Keep in mind these won’t guarantee you won’t take a loss, you need to apply the other strategies we’ve discussed as well, but inflation is accounted in their value.  Here’s how it works, let’s consider property.  If you buy a house (or purchase a fund that buys houses such as units in a REIT) inflation more or less refers to the amount of money in circulation relative to the productive capacity and as people make more money they also spend more money, this is what causes the prices to go up.  Now, if you’d purchased a bond or GICs or mortgage the value will remain the same as the face value.  In other words a GIC purchased today worth $10 000 will always be worth $10 000 at the time of maturity.  But a house will tend to vary in value with the rate of inflation, if inflation goes up so will house prices.  The same is generally true of rents.  That’s not to say that prices and rents are driven by inflation, they aren’t, those markets are much more complex, what it means is inflation will be accounted for so it at least isn’t likely to cost you money.

Where do you think the money goes when the prices rise?

An easy way to understand these dynamics is when the prices rise who gets the extra money?  The people you are buying the real goods and services from.  Think of it this way, you are buying apples for your family, today the prices go up due to inflation so now you’re paying more for apples, but notice you’re buying those apples from someone who now has more money as a result.  (They don’t necessarily have more profit because their expenses might have gone up too but they have inflation adjusted revenue).  In other words if you want to avoid the negative impact of inflation you need to be selling or owning real goods and services.

The class of investments that does this is essentially equities, in other words, companies and real estate where you own the actual asset and not an instrument related to the asset such as a mortgage.  This is because they are real goods and services or involve the supply of real goods and services.  In other words avoid investments with a fixed face value at the time of maturity if they aren’t paying more than the rate of inflation.

​Commodities can be a hedge against inflation.

You might have heard gold is a good hedge against inflation.  Generally, I don’t recommend gold or other commodities but the truth is gold is a real good, likewise for oil, silver, etc. so provided you’re buying it for a fair price over the long term it will protect you against inflation, though many would argue you’re much better off purchasing stable funds of gold mining companies it really depends on the circumstances and your investment goals.  To keep it simple, stick with equities for the majority of your portfolio or fixed income investments paying higher than the rate of inflation.

If you’ve got investing questions you’d like to discuss or like us to cover please click "Ask a Business Question" in the lower right corner of the screen to send it to us, looking forward to hearing from you.

​Where Are You In the Wealth Journey and What’s the Highest Impact Objective For You Next?

Wealth Scales Map

If you liked this article and would like to receive more like this each time we post, enter your name and email address:

Readers like you were interested in these programs:

Your Breakthrough Marketing Review
Profitable Sales and Marketing Machine
Facebook Ad ROI Training
Campaign ROI

We offer personalized one on one assistance.
Want help?

I want help with marketing
I want help with team
I want general business help
I want help with investing
I want help with money management

Other Popular Programs:

The Greatest Business Course Ever
Scale ROI
Team ROI
How To Become Rich Mini Series