INFLATION
Most of us notice that price of everyday things – milk, butter is increasing and that is just because of Inflation.
What is the meaning of Inflation?
In simple words Inflation refers to increase in the prices of goods and services in the economy over time and decrease in the purchasing power of Money.
Inflation is a silent-killer who is affecting your money and lowering its power to buy anything for you. For example – A dollar in 1930 has lost its 97% value in the current time period which means a dollar in 1930 is now worth 3 cents.
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Current statistic related to Inflation –
1) According to data, in 2021 U.S inflation increased to 6.2% which is the highest since 1990.
2) Canada, which is a friendly neighbor to US hit a 4.7% inflation increase, highest since 2003.
Cash is the worst asset to hold during this time. Because it is losing its buying power. Most of us also heard from our grandparents that the cost of living was very cheap in their time as compared to today. And this all is just because of Inflation.
On the other hand there are lots of sources which can help us to protect our Accounts.And In today’s article we will discuss the top 3 ways to protect yourself against Inflation.
1) TIPS – TIPS refer to Treasury Inflation-Protected Securities. They are first auctined in 1997 and they are designed to keep up with inflation. Because they are indexed to inflation that help investors to protect their money to lose its value.In simple words, if the inflation keep on increasing with time our principle value also increase and provide a interest coupone according.
To understand it deeply, you can examine the diagram below-
Like other bonds, every investor can buy these TIPS by lending their money to the government and they will also receive interest holding them.
– TIPS are the good investment for old people. who has no salary or cash flow.
2) Stocks and Bond – Well these are our second weapon againest Inflation. As father of value investing said that 60% of Stocks and 40% of Bonds are best balanced portfolio. And they are the greatest hedge againest Inflation.
Why Stocks and Bond are hedge againest Inflation?
Because, Stocks provide growth to our investment and Bonds can still keep safe in case of cash needed.
How to build an Balanced Portfoilo?
The best way to make an balanced portfolio is to buy an single ETFs. That ETFs should include the combination of both Stocks and Bond.
And in my portfolio VBAL is the all-in-one balanced investment portfolio that gives you exposure to stocks and bonds.And its asset alocation is 60% in Stocks and 40% ETFs.
Real Estate – Well real estate is also the greatest hedge against Inflation. As we can see the value of real estate properties keeps on increasing. And most of the people also use to convert their cash money into real estate because –
– Property price- With the passage of time the value of every single house is increasing.
– Rental Income- By purchasing any rental property we can use it as a passive source of Income. As the price of property increases we can charge more rent from tenants.
Real Estate is best hedged against inflation because of its increasing value over time. This sector also have some downside-
– Not very person have enough money to buy a piece of land.
– Liquidity – Which means Real Estate is not such assets which can immediately turn into cash. And we have to go through a process to buy and sell a property.
If you want to Invest in real easte but don’t have enough money. Then you can go with REIT’s.
3) REIT’s – REITs are Real Estate Investment Trusts that hold hotels, showrooms, offices and generate income. And people who are willing to invest in Real Estate can start by buying REITs in their portfolio.
These REITs have two benefits that they generate a good cash flow and The other greatest thing about REITs is that they usually pay a dividend.
In my portfloio I have VNQ which involved in the ownership and operation of real easte in the United state. And other is VRE which is invloved in canadian real easte sector.
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