4 investment strategies to deal with inflation

Inflation erodes your wealth, but you can protect yourself with effective investment strategies. Discover 4 ways to do this.  

Learn how to protect your wealth from inflation with diversified financial solutions that can deliver returns equal to or greater than inflation losses. These are the 4 investment strategies for dealing with the current economic climate.

Why invest in times of inflation? 

Investing in times of inflation may seem counterproductive, but it is a necessary step to avoid losing real money. Just look at the alternative: with an average inflation rate of 2% per year, after 30 years the value of 100,000 euros should be around 54,000 euros in terms of what you can buy. In other words, you lose almost half of your value to inflation. In Portugal, where inflation has already peaked at double digits, the scenario of property devaluation is very real for all savers.

In short, at current interest rates, term deposits expose assets to inflationary corrosion and, although they are low-risk and very liquid products, from the point of view of real profitability they are not only zero but can be negative. Of course, they are a way to keep some of your wealth in reserve for the unexpected. But to protect against inflation, it is important to consider other types of investment. The good news is that inflation can actually create some profitable opportunities, if you have a good investment strategy in other types of products. 

4 investment strategies that can be inflation winners 

The way to avoid loss of purchasing power is to look for investments with returns above the inflation rate. Admittedly, this is not an easy task, especially for those with a more conservative risk profile. However, one of the most important investment strategies is to diversify your portfolio. In other words, invest in different products, from different sectors, maturities and risk levels (unrelated). This is a way of promoting stability and maintaining a positive balance - if one asset underperforms, the others are protected. 

1. ETFs (Exchange Traded Funds)

ETFs (Exchange Traded Funds) are exchange traded funds. In other words, they are bought and sold just like shares. ETFs are made up of a portfolio of assets and are therefore inherently diversified.

The composition of the ETF’s portfolio is determined by the ETF's investment objective and policy and the manager's perspective, which is to replicate a stock market index - i.e. ETFs are composed to reflect the returns of benchmark market indices. Inflation-linked bond ETFs protect purchasing power against increases in the cost of living. They therefore have the potential to protect your wealth against rising inflation. Rates can be adjusted for inflation and updated every 6 or 12 months, for example. This means that as prices rise, so will your redemption values. However, it should be stressed that it is a rather complex instrument and, despite its name, they did not protect from inflation in 2022, given all the difficulties felt in the markets. Contact Banco Carregosa to find out more information about these ETFs and see if they suit your investment profile.

2. Investment funds

Unlike direct investment in assets, investment funds are more diversified and therefore less risky. The key is to choose sectors that can maintain (or even increase) their margins during inflation, so that your wealth is not affected. 

The sectors that tend to fare better during periods of rising inflation rates are energy, particularly oil and natural gas, banking, real estate and essential goods such as food. In these cases, companies pass on inflationary increases to their customers, maintaining their economic integrity. However, you should be prepared to invest for the long term in order to cushion any devaluation of the fund.

3. Bonds

Bonds are an investment product involving corporate or government debt securities. In this case, the investor lends capital to the institution in return for a periodic payment of interest. This type of investment has three main risks: interest rate, credit and liquidity, and is therefore more suitable for experienced investors with a higher risk tolerance. 

However, allocating a proportion of your investments to bonds can be a way of stabilising your wealth, especially if you choose low-maturity, floating-rate or inflation-linked solutions. Some bonds already incorporate the expected interest rate, in which case investors will receive an inflation-linked increase at maturity. 

4. Shares

Shares represent a portion of a company’s share capital. This investment strategy involves buying shares in a company. The investor becomes a shareholder, with the possibility of benefiting from the company’s performance on the stock market. 

Although this type of investment is more exposed to capital, liquidity and market risks, it can be a good solution if the choice takes into account some specific factors. This is the case, for example, with companies that produce goods or services for which demand remains high, regardless of price rises. It is also important to consider companies that currently have good earnings, in which case the potential for future profit is less important. In addition, the sectors chosen should be able to protect their profit margin and thus preserve their investment. 

Banco Carregosa, experience at the service of your assets

Now that you know the main investment strategies to consider in times of inflation, it is important to remember that the investment process is a personal matter. A strategy that works for you may not work for another investor. It is therefore essential that you seek the advice of experienced professionals in order to gather as much information as possible and to have a clear and strategic vision before investing your capital.

The team of advisors at Banco Carregosa has been through periods of great social, political and financial instability over the years and has a deep knowledge of the market. Contact us to find out how you can increase your wealth, taking into account your specific profile and objectives.