subject: Use Solid Equity Investments To Offset Inflation [print this page] Offsetting inflation's effect on your portfolio requires you to seek higher returns than conservative income investments can offer. That means moving your money into equities and that often means assuming more risk. Here's why...
*The nature of inflation:
Strictly speaking, inflation occurs when the price of goods increase but not because of the goods' increased rarity, intrinsically higher costs to produce them, or some new-found fame they may achieve. No, inflation comes because of higher demands for goods due to more available money in the hands of consumers. More available money means easier credit since our demands often come from 'borrowed' money much of the time - or from cheaper dollars available from excess government money printing.
Deflation is the opposite effect; money becomes so tight that people reduce demand and sellers must lower prices to entice people to buy. The economy may sag for lack of demand.
Government favors increased business for reasons of employment, tax, and institutional protections. It seeks to lower interest rates to keep people demanding. But, alas, continual government-induced credit devalues the worth of our dollars. It prints more money - more than replacement of worn out dollars - to keep people buying. But, of course, more dollars running around for the same amount of goods and services represents inflation - the loss in value that each dollar can buy.
Government tries to limit 'high' inflation (the annual loss of purchasing power of your dollar) which more readily exposes the 'con' game of paper money and its hidden theft of your dollar holdings. So, our money buy less - a little less every year - and investments held as 'dollars' decrease in worth accordingly.
*'Dollar' investments have difficulty maintaining their value under inflation:
Investments held in 'dollars' are 'interest bearing' investments - dollar investments, if you will. Such investments represent you loaning banks, government, or corporations, so many dollars and you get back the same amount of dollars - if you wait out the 'term' of investment. For lending your dollars, they pay you interest too. These are your savings accounts and bond purchases.
Most of these conservative investments - to government, corporations, banks, CDs - present little or no risk of default. Unfortunately, the interest return you get on them is correspondingly small. The longer the loan's 'term' the more interest they offer you to attempt to offset inflation's devaluing of your 'returned' dollars, but it's still not much.
After paying taxes on interest income, short term dollar investment give little, none, or sometimes negative 'real' growth. Secure long term dollar investments are only marginally better at preserving your investment's real value.
*Equity investments can beat out inflation but they carry risk - a variety of risks:
Unlike 'dollar' investments, equity investments give you 'equity' for your dollars. So you don't hold dollars any more; you own a share in a company (business), a house, land, a commodity, a copyright, or some other asset. The 'value' of these assets change over time based on demand for them. All things being equal accept increasing inflation, future demand at the same 'value' translates into more dollars for the same equity item you bought. That's how you offset inflation's effect.
But these assets are subject to varying degrees of risks, too, such as poor business management and market downturns. Good research should minimize risks associated with poor company prospects, speculative deviations, and the like. But you must be able to last through general economy or specific market downturns to recover your original purchase values - which is a risk too.
Always a good approach is to diversify your money among different 'good value' equities that your research shows as temporarily depressed. They should recover and grow faster then inflation as the economy or market recovers.
by: Shane Flait
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