Who is afraid of inflation?

Company shares and bonds – a perfect marriage, most of the time

Ideally, both partners in a relationship support each other. When one is sick in bed at home, the other takes more care of household chores. 🤒 This is how normal company shares vs. bond relationship works in your typical investment portfolio, too. Sometimes, company shares suffer temporarily, for example, because of an economic downturn. Then, bonds tend to gain value and thus help stabilize the portfolio (your mix of investments). 🤝

But inflation knocked down both partners

This year, however, inflation hit both, company shares and bonds. hard. This probably made you wonder why almost every position in your portfolio turned red at some point in 2022. Who is to blame? The answer: Several unusual problems – ranging from COVID-related heavy money printing and interruptions in global trade to the tragic war in Ukraine. This has created the biggest jump in consumer prices in over 40 years. 💸

Generally speaking, inflation is very difficult to handle in investment portfolios, especially when markets make a switch from a low to a higher inflation environment.

Time heals wounds – and portfolios

The best remedy to this problem is still holding a well-diversified portfolio and patience. If inflation stays higher over the next few years, loans to companies and countries would likely adjust their interest rates to reflect higher inflation. Earnings of companies, and sooner or later prices of the company shares, would also rise with higher inflation.

Gold remains a good protection

Precious metals as part of your portfolio could also help protect against inflation, at least to a certain extent. If you have checked the price of gold lately, you may have wondered why it lost value. Keep in mind that the gold price is usually given in US dollars. The dollar has been strong lately. Actually, gold has held its value well against most other currencies, including the Swiss franc.

This is very impressive, given that interest rates have risen a lot this year and gold is always in competition with interest rates – because it doesn’t pay any!

Staying away from investing is not a solution!

There is no magic cure against inflation, especially since the early phase of a transition can seem somewhat painful for investors. Staying invested though is still better than holding on to cash, which offers no protection against inflation.

The longer you stay invested, the better your outlook should be for beating inflation rates with your investment performance. 😎 In contrast, cash offers you no long-term upside potential. Cash only guarantees you losses equivalent to the inflation rate year after year after year…

Selma's learning: Look towards investing any time the inflation scare returns!