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Who is afraid of inflation
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Who is afraid of inflation?

Daniel Trum
by: Daniel TrumSep 14, 20225 min read

Probably, you expected bonds to compensate losses on company stocks. But inflation has made both suffer at the same time. Here you get to know why this is (by far) not the end of successful investing, and why gold has actually done a very good job of protecting your portfolio.

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.

What does well-diversified mean?

Well-diversified means that you do not put all your money into one basket. It means that you spread the amount you invest across different investment products, and across areas around the world.

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!

About the author
Daniel Trum

Daniel Trum

Daniel is an economist (MSc) and financial analyst with over 10 years experience in the Swiss banking industry. He leads the investment management at Selma and he’s passionate about finding better ways to invest for everybody. Follow him on LinkedIn to get regular updates on what he thinks about financial markets.