The cost of living could double over the next decade or two. What are you going to do about it?
Right now, no matter where you put your savings, it is certain that you are losing money every day. Inflation moving up means that consumer prices are rising faster than the best savings rates in interest can. If you want to keep up with the cost of living, you have to cast your net wider than a simple savings account.
If you are young and still in the workforce, your best defense is your talent. Salaries tend to keep up with inflation, at least over long periods. If you are retired, you’ve got only your assets to lean on.
There are few strategic moves for combating the Consumer Price Index, fixed-income investing advises and how to own commodities suggestions that I would like to review in this article.
You should consider a combination of different inflation resistance strategies. Some are speculative, while others expensive for everyday use and you are not obliged to adopt them all.
Here are few strategies how to combat inflation. Most probably, you already have adopted some of them.
Invest in real estate
Over long periods, home prices more than keep up with the price of living. The real price appreciation has averaged something like 1% a year over the past century.
Despite the recent real estate crash, which is close to the bottom, I and many analysts worldwide are pretty confident that home prices will at least double, if not triple during the next economic cycle.
If you are young and far from retiring, you should consider buying property with potential by obtaining a bank loan. If you just retired, your strategy would be to postpone downsizing of your assets.
Owe money
If you are retired, your mortgage should be paid off already. If you are younger, it may make sense to owe money. To the extent you owe money you get a windfall from unexpected inflation. That is because you pay off your creditor with cheapened currency.
Why inflation can’t hurt you very much? A run-up in inflation will raise interest rates, but it will also, over time, make your home’s value higher than it would otherwise have been, while your mortgage debt remains fixed. So you’ll end up with more home equity than you otherwise would have had.
I’m not advocating or encouraging borrowing, but if you are a solid income earner, the local banks are becoming easier on lending, while the interest rates are still low. If you are young, heavy mortgage won’t make you vulnerable to inflation as you may think.
Invest in stocks
A stock is a share in a business that probably owns at least some hard assets and has some prospects for increasing its prices as the currency falls in value.
It is very much likely, a surge in inflation can hurt stocks for a while. However, over long periods, stocks beat inflation. Over the past century they have earned 6% a year, above and beyond inflation, including dividends.
At the moment, local stocks are extremely undervalued in relation to projected corporate earnings. Nowadays, it is easy even for young people with fixed income to build a small portfolio of blue-chip local stocks with a long term perspective. The civil unrest in North Africa and the Middle East, that brought MENA markets to long not seen lows, it won’t continue forever.
If you are looking to preserve your assets and profit from it, you can confidently put at least a third of it in equities right now.
The cheap, easy way to own stocks is through a brokerage firm related to a major local bank, such as ENBD and ADCB.
Invest in resource funds
Owning shares in companies that dig stuff out of the ground, such as oil, gas, gold, silver and even agricultural is a solid investment. Commodity prices rise proportionally, if not faster, than the Consumer Price Index.
Most of the UAE national banks manage portfolios of investment funds that are open also to medium size investors. The minimum for participation is AED 10,000 ($2700) and the brokerage fees are in the range from 1% to 3%.
Inflation is reportedly the second biggest source of anxiety for retired people, after health. They are old enough to remember the 1970s, when the prices of everything went up, except bonds and bond portfolios were destroyed. For young people, however, it may present opportunities.
By Gergana Mineva, at Editor@DubaiChronicle.com
