Inflation is a phenomenon that we see practically every day, everything costs more and more. However, it is not only possible to face it and be prepared so that it does not affect us too much; but also, it is possible to make money at the expense of inflation
And here I want to tell you exactly how to do it.
Earlier we talked about how to prepare for an inflationary economy, and what you need to do to keep your finances as strong as possible so that it doesn’t affect you.
Very good, considering that your money is worthless and less; or in other words, the same amount of money that you have today, will not be enough to buy the things you buy today, in a year, or in two years … But the purchasing power of those pesos, dollars, or whatever currency is decreasing.
It must be taken into account that your wealth, or your assets, or what you have in liquidity, ideally, is not in cash.
Normally the recommendation is to have something in reserve, in case there is an unforeseen expense, an emergency fund, a saving for situations that suddenly you did not have thought would occur; And if a cost suddenly arises, you don’t have to go into debt to cover it.
Although many people are reasonable enough, for example, to have a 30-day CDT, in which case if something happens, they can use their credit card at a fee and without interest, and when the CDT expires, they withdraw and with that they pay, and they never spend money they don’t owe.
Other people suddenly don’t like the credit card thing or something, they just have the money in a savings account and voila. Now when we think, “How do I protect it from inflation?” There are several important considerations: We are going to take into account the two types of interest.
1 Interest Payable (Debts)
It turns out that when we pay debts, there are two types of interest rates: Fixed rates and variable rates.
As the name implies, fixed rates are an interest rate where you pay the same rate every month. In other words, all you do is multiply the amount you owe by the rate that they gave you from the beginning, and that same calculation applies for the entire duration of the credit.
If inflation rises or inflation falls, what you are paying in interest can probably vary in proportion to that inflation. I mean that if, for example, you have a loan where you are paying 9% annual effective interest, and it turns out that inflation today is 4% or 5%; Ready, you are paying double the inflation in interest.
But it turns out that if your rate is fixed, and you have it in a mortgage loan for 15 years or 20 years, to say the least; and in some of these years inflation becomes 10%, the interest rate that you are paying, being a fixed rate, is still 9%.
That is, you may pay less interest in a year than in inflation.
Considering that inflation is on the rise in a country with an inflationary economy, securing and locking a fixed rate on loans, especially mortgage credit, allows you to benefit in the future.
Now, if the opposite happens and it turns out that inflation decreases considerably and the rate you set remains the same, then at that moment what is the advantage: That you can look for a portfolio purchase from another entity, which offers you an updated rate at the moment, and hopefully it will also remain a fixed rate. So this is a benefit that practically only real estate gives you, so this is one more reason why it is an excellent investment to buy real estate.
Especially if it is to rent and not to live in it .
The fact is that a traditional debt type credit card, consumer credit, vehicle credit, or payroll, or whatever; usually has a variable rate … Which means that if inflation is increasing, interest rates are increasing, and what you are paying monthly, or is a higher instalment, or you pay less to capital. It takes you longer to new pay your debt, because of inflation, so it is always ideal for discarding these rates and going for a fixed rate.
2 Interests You Earn (Investments)
The other type of interest is the interest in your favour, the interest you receive, not the interest you pay.
If you have no idea of investments and you are just starting halfway to research, to understand the subject; I have a video where we talk primarily about how to invest for beginners, where we analyze the different types of instruments that exist, the risks and many other things so that you can take a look.
So here we already talk about the opposite case:
Instead of looking for a fixed rate or investing in fixed income instruments, such as Bonds or CDTs, we prefer the opposite when investing.
What’s going on?
What if you invest, for example, in a one-year CDT today, and the CDT gives you a rate of 5%, assuming that inflation was 4%
Usually, inflation is updated every month.
So yes, at this moment, it may be 4%, or 4.5%, and your CDT rate is higher. But what happens if inflation is 5% in a month? So in 3 or 5 months, it is 5.5%? Or in 8 months, it is 6%?
This can happen, especially in an economy where you don’t know what will happen. The opposite can also occur: interest rates go down, then inflation goes down; therefore, having secured a CDT of that rate today would have been an excellent idea.
In fact, before the quarantine, the pandemic and all this madness started, you could get CDTs of up to 6% or 7% flat rate, even for three years, or up to 5 years, which was crazy! And if someone took advantage of it, considering everything that has happened and that the interest rates made the CDTs go down a lot, the fixed income lowered the yield and many other things; it was an excellent idea.
Now, as we are foreseeing, the opposite could happen, although nobody knows what will happen and nobody can guarantee you that they know or have an algorithm that tells them what will happen for sure …
What we do is say: “Well, let’s assume that inflation is going to continue to rise, maybe investing in fixed income then is not a good idea; because if everything goes up, interest rates go up, but my earnings are going to stay fixed, it’s not worth it .
So this is where we consider investing in equities. .
In companies where the way to select them is that it is a company that if it raises the prices of its products or services, users will also continue to pay without a problem.
There are things in which, if prices go up, the demand goes down, fewer people are willing to pay for the same but more expensive. But other things go up in price like this, and people will buy them anyway.
For example, without mentioning a specific recommendation, let’s talk about iPhones. People will continue to buy iPhones, even if they go up in price; in fact, they’ve only gone up in price in recent years, and people just keep buying them like certain Samsung cell phones, high-end, mid-range or whatever.
In fact, all cell phones have gone up in price considerably because before we used to buy very cheaply, today we all buy expensive cell phones, even in proportion.
So does Coca-Cola.
If you want a Coca-Cola, you go to the store, and they tell you that it is worth 500 pesos more, or a few centavos of dollars more … Well, it does not matter, you will still buy it because it is Coca-Cola and because another product does not replace it
So, depending on the company and the products or services it offers, if it raises its prices according to inflation or the rise in raw material costs, gasoline costs, and all other variables that may affect; and the users, the clients, are still willing to pay this increase, as it is an excellent choice to invest in them.
We also talk about companies that offer essential services (water, electricity) and many other things that we still have to pay even if they go up in price, and there is nothing more we can do because we cannot run out of those services …
By investing in those companies, in those stocks, basically the value, at least in a considerable time, will compensate for inflation.
Minimally it will remain in line with inflation, and ideally, it will rise above inflation, assuming that the company continues with its productivity rate. You can buy these types of shares directly, or you can invest, for example, in investment funds that include them within their portfolio.
Considerations For Investing In Equities
1. Normally, equities increase in value when inflation rises, and vice versa. If inflation goes down, these stocks generally go down in value. Some actions and companies go outside the norm, and we will always have those that do not behave according to the standards.
There may be technology companies that launch a product, make a decision that catapults them to success, or do something terrible, which causes people to have a bad perception. As a result, new investors do not want to invest in it and lower their prices. Prices.
Regardless of this, on average, we know that equities generally benefit from inflation in terms of returns.
2. If you are going to invest in equities then, the idea is that you do not invest with a term of less than a year , or preferably a year and a half.
Because, as there are going to be devaluations, devaluations are practically guaranteed in an equity investment, since it does not affect you if you are going to withdraw your money in a short time.
If you have, for example, money and you want to use it within 3 or 6 months, and you invest in equities, it may be that within those 3 or 6 months, the investment will be worth less than what you invested, and at the time of withdrawing you will lose money.
But remember that you only lose money the moment you cancel your investment, the moment you withdraw your money.
If you invest 1,000 dollars, and within six months you see that your portfolio is worth $ 950, it is not that you have lost $ 50 … You lose $ 50 only if you withdraw your $ 950, because there you no longer have any position in your investment.
But if you wait and assume that in 1 year and a half, those $ 950 are worth $ 1,200, and you earn $ 200 on the initial investment if you withdraw.
It also does not mean that you made money if you have $ 1,200 on paper because it may come back later, and the value will go down.
That is why the recommendation is always not to invest for a term of less than one year .
Suppose you have money and a fixed destination for that money in 3 to 6 months. In that case, it is better to invest in a CDT, which is not going to make you earn lots of money, but it is not going to risk it either, because I suppose you are not going to wanting to risk capital for which you already have a particular objective.
What a CDT does is that it usually is very close to inflation, and for the same reason, what it achieves is that the value of that money is maintained. So you win, but you don’t win compared to inflation, depending on the rate. So of course it is always advisable to invest in things that you truly understand, to know what the hell you are investing in, and if not, do not invest.
3. Even in these times of inflation where fixed income is not so recommended, the rule of diversifying always applies. Even today, although it is not such a good idea to invest in fixed income, you have to invest in fixed income just to offset a portion. It is not that all your money went into fixed income, nor that all your money went into equities … You must distribute, even in real estate, if that were the case.
When we distribute a portfolio and diversify it, we spread the risk. Therefore, although suddenly we do not earn as much money in specific scenarios, we do not lose so much money in other techniques.
You have to be very smart about it.
The use you give to your money determines the results you can achieve financially based on the current situation. The idea is that more and more, you can develop the criteria to make better decisions to take your finances to the next level.